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Google - Essay Example

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The performance of Google, which debuted using the online auction process in August, 2004, does not suggest that the online auction process served as an efficient pricing mechanism since it did not minimize Google's first day price surge. "When Google filed in April 2004 to go public, it outlined an unusual IPO method that was widely seen as an assault on Wall Street practices…
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Download file to see previous pages This increase between the offer price and the open price is much greater than the increase for typical IPOs in 2004. Indeed, 82 percent of the IPOs issued in 2004 experienced less of a jump from the offer price to the open price than Google did, and the statistics were similar for IPOs issued prior to Google's debut and following Google's debut.
The enormous post-auction price increase of Google, especially in the immediate weeks and months following its debut, when there were few substantive news releases on changes in company strategy and fundamentals, further suggests that the online auction method may not have priced Google efficiently. Google subsequently soared in the following months to a high of $317.80 on July 21, 2005. As of June 29, 2005, Google had exhibited price appreciation of 186.8 percent, relative to its open price.
Critics of Google's IPO initially argued that the auction was a failure because Google slashed the number of shares that it would sell at public auction from 25.7 million to 19.6 million shares. Also, it dropped the target price range from the $108-to-$135 range projected in late July to the $85-to-$95 price range (Knight Ridder, August 19, 2004). At the time, many analysts suggested that the earlier Google price range had been overpriced; yet, Google's closing price reached the lower end of that price range after 18 days of trading and reached the higher end of that price range after 32 days of trading. The lessening interest in Google at the time that it reduced the price range during the summer was possibly due to some combination of the following factors:
- The lack of information provided by the company during the process about its uses of capital
- A slump in price appreciation for June IPOs
- Reservations on the part of investors about the use of the online process.
Who benefited from Google's price appreciation Under the traditional process, the preferred clients of the underwriting investment banks can benefit from the initial IPO underpricing and subsequent price appreciation since they have the initial allocations. In the case of Google, the beneficiaries in the price appreciation have been:
1. those investors who bought Google when it first began trading and held it until the price increased substantially and
2. the Google co-founders and the chief executive, as well as the venture capital firm involved in financing Google, who were allocated shares early in the process, but who could not sell them until the "lock-up period" expired.
"Google announced in its IPO prospectus that it wouldn't provide traditional earnings guidance. While it took this stance to avoid short-term thinking, the move also likely left Google's directors knowing more about company prospects than other investors. The third quarter, which Google was in at the time, proved to be one of spectacular growth." (Delaney, September 2005) By July 2005, the CEO Eric Schmidt and the company founders Sergey Brin and Larry Page had sold $1.7 billion in stock, other executives had sold more than $800 million in stock, and no open market purchases had been recorded. Indeed, Page and Brin have sold 3.7 million and 3.8 million shares, respectively, or roughly 400,000 shares per month, while Schmidt had sold 1.3 million ...Download file to see next pagesRead More
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