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Google and the IPO Process:
Google's initial public offering or "IPO" is undoubtedly one of the hottest topics of the day. Like many initial offerings springing from well-known and successful companies, many investors harbor great optimism regarding the potential of the company in the IPO phase. However, like most initial offerings, Google's endeavor is full of several complex, unusual, and uncertain factors. Be that as it may, one must begin with the "facts."
Google's IPO date was on the 19th of August, 2004, and was started at a price of $85, significantly lower than its previously projected low price of $108. Interestingly, Google choose to use an innovative way of offering the sale to the public via "modified Dutch Auction," in which 19,605,052 shares were offered at a value of $1.67 billion, with an initial market cap of $23.1 billion (About, 2004)
Financial Management Strategies and a Break with Convention:
Ah, yes. Who doesn't love Google? After all, many remember those heady days when one was regimented to the earliest dial-up internet services and their accompanying gutless search engines -- only to be unexpectedly and happily presented with a far better option. Yes, Google became the rallying cry for web-surfers everywhere, and as a result, the site still enjoys a strong allegiance among users that is hard to match. Whether this well-deserved loyalty would extend itself to Google's recent IPO is uncertain. After all, few investors who survived the demise of the tech and start-up boom are as trusting as they once were -- even concerning immensely popular and iconic companies.
Perhaps as a response to this reality, Google has managed to break with convention, in a bid to garner optimistic buying among the public -- offering a relatively unheard of Dutch auction both to perhaps, rein in any initial extreme over inflation of the stock (much like that found in VA Linux (La Monica, 2004), as well as to draw certain interest in its very novelty.
Indeed, one can only appreciate the forethought (and a self-serving forethought at that), in Google management's important moves toward preventing a "helium-infused opening pop (La Monica)." However, according to some, this attempt may still not be enough to insure reasonable pricing. Further, the reason this seems to be the case is closely tied with the wide discrepancy between the lowest expected price range, $108, and the actual cash flow realities of the company.
Cash Flow, How Does Google Stack Up?
Of course, few can think of the valuation of Google without comparing it with that found in its rival Yahoo. Indeed, it is in this comparison that one can gain significant insight into the possible problems that may eventually be found in its overvalued stock -- a situation highlighted by the fact that the low price of $108 tallies in at a full 19 times more than the projected cash flow for 2005. Instead of this, many assert that Google (and investors) should instead consider Yahoo as a benchmark for early pricing, with Google stock trading at least 25% below. This, according to analysts such as Mark Mahaney of the American Technology Research firm, would accurately reflect the value of the company as one significantly less diversified than its close Yahoo cousin.
Instead analysts assert, Google should trade significantly lower than its projected "low," and trade at approximately $95-$100 a share (La Monica). Not only would this place the stock at a healthy 17% over projected 2005 cash flow estimates, but it would accurately reflect the balance of the market -- especially with regard to competitor Yahoo.
Again, this tactic is one most likely to actually strengthen the company more than any short-term spike ever could. Further, when one considers the very real pressures on the company and management to drive sales and earnings up in support of the stock, its likelihood of displaying a somewhat capricious pattern is highly likely. Thus, as Google management knows all too well, although high prices are exciting to some, they also carry with them immense pressure. Further, when the height towers above the year's earnings, even a small disappointment can herald a devastating dive.
Opening Price -- Hubris?:
So why then, did Google set its opening price so high? The interesting thing is its very unorthodox offering via auction just may have played a significant role. After all, unlike in the more "traditional" IPO system, in which bankers set the prices low to insure sufficient profits, the auction system not only allowed the company to set a higher price while reaping the reward, but the actual individual stock buyers did as well. However, although many consider Google's management of the IPO offering via auction to have been a stroke of genius, many also consider its initial (July) price to have been foolishly high -- so high, in fact, that some commentators labeled it nothing more than stark "hubris (Gillmore, 2004)."
What's In It for Google?:
Many consider the question of "why go public" to be an obvious one for most companies. After all, even though Google has been extremely successful financially, it is obvious that the main goal of going public is to allow its principle investors to gain some control of their funds in a "liquid form (PBS, 2004)." Additionally, in an atmosphere of increasing competition and sophistication of other similar products (including Yahoo), it is essential for them to capitalize on its remaining "on top" loyalty while it still is poised to do so. Not only does this assure a high valuation on the stock by buyers, but it also allows for the greatest amount of profit to be realized from its popularity. Of course, this means that the company can be in an even greater position to withstand the growing competition. More funds simply equal greater development, helping them to "keep ahead of the game."
Another interesting aspect concerning Google's IPO is the positive position company management/founders seem to gain from the auction method -- specifically in creating two different "types" of stock (PBS). This means that Google's IPO offerings are made up of two classes of stock -- those offered to the managing founders which are worth ten times the voting weight of the ordinary share (Valdmanus, 2004), otherwise known as a "super stock" and those offered to the general public. In doing this, Google was able to not only maximize its share of the profit in the offering (as opposed to the banks), but in using this "two tiered" stock system, they still managed to maintain significant independent control over their company that other "search" heavy companies only dream about. In fact, it seems that the company will remain so self-controlled -- as Charlene Li characterizes in her PBS News Hour interview, that:
they are basically saying to the shareholders, "You're investing in a company and an executive team that really knows what's going on, and either you buy into us and our strategy or you don't. And sure, we'll be listening. We'll be listening to our advisors and listening to what the market says but we won't be beholden to quarterly earnings, quarterly expectations because frankly we need the flexibility and the speed in the marketplace to be sure to do the right thing."
Of course, within the computer/internet industry, having flexibility (and the funds to support that flexibility), is one of the essential components of competitive innovation. However, there is significant criticism of Google management in their decision to offer the two different types of stock.
Two Classes of Stock: A good idea?"
Although there can be little doubt that the innovative and creative "juices" can flow a lot more freely if one is not mired down by the voting whims of the "masses," many believe that Google management's creation of the "super stock" vs. The "normal stock" is…[continue]
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