Preparing for the Google IPO

Case Submission - I

Submitted to

Professor. Vishwanath S R

By

Gaurav Kacholia

Komal Verma

Prakarti Vaid

Akshat Paliwal

21.10.2015

Gautam Budh Nagar, U.P., 201314

Q1. What is Google’s business? What are the strategic threats to Google?

Google was one of the largest search engine on the web, administers index numbers of billions of URLs and answering millions of search queries per day. Google gives a bundle of services like Google Adwords (ad sales), AdSense (text based ads), Froogle (online-shopping directory), Google toolbar and Gmail.

Strategic threats to Google:

Growing number of shareholders would have triggered disclosure, so the information advantage of private ownership would no longer be sustainable. Therefore, goggle at the time of filing IPO has kept number of intriguing features: unconventional price setting mechanism modelled on Dutch auction; a dual class shareholder structure, remarkably reduced role of underwriters and in total 31 underwriters for the wide-spread distribution of shares.

It also had threat from its competitors like Microsoft and Google, where MS would increasingly use its financial and engineering resources to integrate web search with Windows OS in order to compete with Google, which would eat away its major market.

Yahoo (another major competitor) announced its purchase of Inktomi, a search engine based crawler based search technology. In July 2003, Yahoo again announced its buyout of an ad-placement specialist- Overture (which was another rival of Google), which had advanced search capabilities with AltaVista, AllTheWeb- Crawler technology.

MS and Yahoo may have greater ability to attract and retain users than Google as they have a greater ability to attract and retain users because they operate internet portals with a broad range of products and services.

In order to match its rival’s portal appeal, it would become distracted from/ indeed cause outright damage to its core search product.

Competition from dedicated web service providers may pose a serious threat as compared to a diversified Google in context of rapidly changing technology.

Internet advertising companies and destination websites that bundle their services with internet access could pose a long term threat to Google’s dominance of search based advertising.

Q2. What are the cost and benefits of going public? Is IPO under-pricing a cost to the company?

IPO financing is cyclical. There are “hot” and “cold” markets when IPO activity peaks and then wanes. Industries may for a time be the “hot” industry, for example, tech firms in the late 1990s.

Previously, there were clusters of IPO activity in energy, biotechnology, and communications. Industries become popular at certain times because of their high growth rates and high returns.

High tech companies had very high returns (but also high risk) in the late 1990s. The benefits of going public include:

a. Raising new capital for the company.b. Providing publicly traded stocks that can be used in acquiring other companies.c. Having listed stock that can be used to compensate and retain key employees and

providing personal wealth and liquidity for entrepreneurs.

Key drawbacks include:

a. The high financial cost of an IPO (transactions fees for doing the deal).b. High managerial costs (management time taken up in managing the deal rather than

the core business)c. External pressures to maximize stock price once the firm has gone public.d. Continuing information disclosures.

Q3: What is the role of banks in the IPO? How do they make money?

Investment banks play following roles:

1. Offering expertise – Including underwriting to corporate clientso Underwriting Process:

Origination : In this lead underwriter advice the issuing firm on type, timing and pricing of the issue (book building or auction), prepare the SEC registration statement and formed a banking syndicate to distribute the issue

Distribution: in this underwriter marketed the issue to institutional investors and the public

Risk Bearing: In this underwriter agree to buy the securities from issuing firm and sold them to their clients

Certification: It ensures the quality of the issue and place significant burden on the underwriter to avoid mispricing

2. Engaging in security sales & trading activities o Stabilizes the price of shares by trading in the after-market

o Enhance visibility and liquidity of shares by providing analyst coverage

Investment banks make money by charging an underwriting fee and commissions for providing these services to client. As per the case facts it id US averaged 7% in the period of 1990-2003. Also money left on the table goes to IPO = (end price of 1 st day – offer price) * no. of shares

Q4. Are investment banks threatened by the google process?

A4. Yes investment banks were really threatened by the Google because:

a. Google intentionally reduce the role of lead underwriters Morgan Stanley and Credit Suisse First Boston (CSFB).

b. They tied the hands of the investment bankers by bringing the criteria of price setting by adopting the process auction structure for the sale.

c. Google was able to negotiate the underwriting fees by 8% to 2.75 %d. In 2.75% fees also google use to pay 1.75% was guaranteed money and rest was to be

paid on the discretionary basis.e. As lead underwriters would maintain a master book recording the bids from all

participating underwriters, Google has the authority to decide the final decision regarding the terms of term of the offering and recipients of the share.

f. It include 31 underwriters in the process to share the large chunk of pie from Morgan Stanley and Credit Suisse First Boston (CSFB).

Q5. Do you expect google IPO to succeed in the long run?

A5. We believed that Google IPO has succeeded in the long run because the way business in Technology was growing for Google was huge. Google used the Dutch auction process to come up with the IPO in the industry which definitely have some major advantages like:

They saved lot of money in Investment banking fees Strategy-Proofness of the auction makes bidder bid their true value for a share of the

company It allows more potential investors because anyone can issue a bid in the process By bringing more potential investors companies are able to raise their true capital

valuation in the market No fund is left on the table Share price is often priced what market expects.

The key difference between book building and other IPO methods is that the book building method gives underwriters control over the allocation of shares. In contrast, auctions require allocations to be based on current bids, without regard to any past relationship between certain bidders and the auctioneer, and they are usually open to everyone.

However there are some flaws in the Dutch auction method for ex. Bidders are only allowed to enter one bid instead of many bids at different share price but then also this method is more perfect for the company and the investors.