How IPOs Work

The Google IPO
Image courtesy Google

The IPO of Internet search engine Google wasn't one of the biggest IPOs ever, but it was a media sensation. While many aspects of Google's IPO were standard, it differed in some important ways. Also, Google made some mistakes that affected its IPO.

The biggest difference was in the way Google chose to allocate shares. Instead of letting the underwriter dish out shares to favored institutions, Google held a Dutch auction in which everyone who wanted a share put in a bid. The lowest successful bid became the price that everyone got their shares at, even if they bid a higher amount. This method guarantees that the initial offering price is set to sell all of the shares at a price that conservatively reflects market demand.

Google's initial price range for the stocks was between $108 and $135 per share, a fairly high amount that was meant to scare off speculators. Several well-publicized problems with the IPO caused that price to drop, and by the time the Dutch auction had concluded, the official starting price was $85 per share.

What were the problems with Google's IPO? The first was an interview published in Playboy magazine. This violated SEC rules restricting comments that can be made about a company in the lead-up to an IPO. This could have delayed the IPO, but Google avoided this by admitting that misleading statements were made in the article and by issuing a revised prospectus that contained the entire Playboy article -- a move that probably cost them tens of thousands of dollars in printing costs.

The other mistake was a technical issue regarding the issuance of shares to employees before the IPO. The company failed to register those shares, forcing them to offer to buy them back. The SEC fines companies for this mistake.

However, Google's biggest "mistake" was not playing the usual Wall Street game. The Dutch auction method was meant to give individual investors a chance at the IPO instead of the usual bystander's role, watching from the sidelines as major investors and houses bought up all the shares. It worked, but it left the underwriters and the companies who usually profit from their mutual deals fuming. Google also paid the underwriters a fraction of the commission they usually earn. Since the value of a stock depends in part on the efforts of these Wall Street insiders to convince others of that value, Google's refusal to play ball surely had an effect on the stocks' valuation.

So how much money did the Google IPO make? For the company, it raised $1.67 billion, rising to a value of more than $100 per share in the days after the IPO. But here's another way to look at it: Google employees purchased shares for as little as $.30 per share when it was still a private company. Someone who had just 10,000 Google shares is now a millionaire.

For more information on IPOs and related topics, check out the links on the next page.

More to Explore