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On the contrary, in traditional method of IPO allocation, the price range is arrived at the investment banks that have access to detailed information and are experts in their respective fields. Moreover, contrary to traditional method, the online auction method is not required by law to disclose as much information as required in the traditional method.

2. Mispricing
Due to lack of rigorous scrutiny by investment banks, there happens to be a mismatch on the pricing front. At times, due to initial risk, aversion by retail investors may lead to under pricing of the initial offer price.

3. Minimum Price Spike
The price spike, which happens in traditional IPO allocation methods infact, does well for the stock. It imparts an aura of success to the stock, which in turn will boost the stock higher leading to the gains for investors. This doesn't generally happen in case of auction method.

Dutch Auction: Google's Case

Few companies like Salon.com, Overstock.com and Ravenswood Winery have earlier adopted the Dutch auction method; however, the IPO that brought a lot of limelight on this method was that of Google, the Internet search giant.

However, one of the supposed advantages of Dutch auction method of having minimum spike didn't stand ground in case of Google. Google's initial public offering took place on August 19, 2004. Total of 19,605,052 shares were offered at a price of $85 per share. The sale raised $1.67 billion, and gave Google a market capitalization of more than $23 billion. Google's offer price was $85, but it opened at $100, a 17.6% increase. Thus, the increase between offer price and open price was much greater than the increase for typical IPOs during that period. So the supposedly advantage of minimum price spike didn't stand ground. And also it means that Google didn't raise the full amount, which it could have, that means it left a substantial amount of money "on table".

Lets see if there are other firms who follow in Google's footsteps and embrace this lesser used method of IPO share allocation. The more the number of companies uses this method, the clearer the implications will be for each of us to observe and understand.

Further Reading: As per a research study conducted, the book building is less risky then a sealed bid-auction. The study was conducted for two methods of IPO allocation. (Global Trends in IPO Methods: Book Building Versus Auctions with Endogenous Entry, Journal of Financial Economics, Volume 78, Issue 3, December 2005, Pages 615-649 by Ann E. Sherman)

Concluded.

* Contributed by: -
Vijay Singh Poonia,
PGDM 2007-09,
IIM Calcutta,
Has work experience of 3 years with Indian Oil Corp Ltd.