Case questions: Preparing for the Google IPO
Please limit your write-up to no more than twelve pages.
1. Business Outlook. What exactly is Google’s line of business and what are the main revenue-generating channels? In your opinion, what is the outlook for the online search-engine industry going forward? Who are the main competitors for Google? What are the main threats (risks) to Google?
2. IPO Pricing. How would you evaluate Google’s cash flows and growth opportunities? In your opinion, was the proposed (both from the initial report and the final report) pricing of the Google stock (hence the value of the entire company) accurate? A standard valuation method for private firms (including those planning on doing IPOs) is based on a range of multiples (P/E or market-to-book ratio of the entire firm) of comparable, publicly listed and traded companies. In this regard, which companies would you consider as comparable firms for Google and was the proposed pricing for Google stock accurate relative to these comparable firms?
3. Going Public Decision. What are the benefits of going public for Google? What are the costs of going public? Are there any major concerns for Google’s founders/managers and inside shareholders of the post-IPO firm? How would you evaluate the proposed equity ownership and governance structure of Google after IPO? When making your assessment would you consider what Google’s competitors may do? What about the timing of the IPO in 2004 (market conditions, and firm’s financial health, etc.)?
4. IPO Mechanism. Can you briefly describe the process of running a Dutch auction of IPO shares? What modifications did Google make in its IPO auction compared to a standard Dutch auction? Compared to the book-building mechanism, what are the advantages of an auction? What are the potential risks involved with an auction? Do you think Google make the right choice in its IPO mechanism and why?
5. The Role of Underwriters. What are the roles of investment banks (IBs) in an IPO (in general)? What were the roles of the IBs (lead and participating banks in the syndicate) in the Google IPO? What are the main differences in terms of the degree of involvement of IBs in a book-building versus an auction IPO? If you were the founder of a private firm which is about to go public, how would you choose the IPO mechanism (auction versus posted-price mechanism)?
6. IPO Auction Puzzle. Given the phenomenal success of the Google IPO, one may expect that the auction mechanism, in which the role of IBs (as well as fees paid to them) is minimized, would gain more popularity among private firms. However, the puzzling fact on IPO mechanism choice is that relative to the auction mechanism, book building has gained significant market share (against auction) worldwide over the past two decades, including those countries where the auction mechanism was popular (e.g., France and Israel) and where IBs are less dominant in the capital market as compared to the U.S. How do you explain this fact? Why are firms willing to choose an IPO method that is so much more expensive than auction (both in terms of underpricing and in terms of underwriting fees)?