Auctions versus book building

11 auctions were conducted from 1999 up to Google’s 2004 extravaganza. They differ from those of bookbuilt IPOs in a number of respects. Issuers choosing the auction route left less money on the table and saved on underwriting fees. Underwriter spreads in the bookbuilding group ran about 7%, but spreads for the auction IPOs were significantly lower. Only three out of the 11 auction IPOs had spreads of 7%, and Google’s was just 2.8%. With the exception of a single issuer, the auction group faced lower underpricing and, in some cases, IPOs were overpriced. The authors found that the combination of underwriting spreads and underpricing averaged 9.62% for the auction IPOs and 15.6% for the bookbuilding sample. Some argue that underpricing brings better analyst coverage and reduces litigation risk, but the complete absence of litigation among the auction group trounced the bookbuilding sample’s litigation rate of 7.2%.

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Reference

Bookbuilding Versus Auction Selling Methods: A Study Of US IPOs
By: Prof. Kuntara Pukthuanthong, Prof. Nikhil Varaiya, and Prof. Thomas Walker San Diego State University (KP, NV); Concordia University, Montreal, Canada (TW)

Venture Capital: International Journal of Entrepreneurial Finance - Vol. 9, No. 4, Pgs. 311-345