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Google’s Ipo - Global Capital Markets and Institutions

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Exclusive Summary        1

Why Go Public?        2

Ownership structure        3

Market Conditions        4

Valuation Approaches        5

First Day Returns        7

Post IPO Prices        8

Market Valuations following the IPO        9

Price Expectations        9

Exclusive Summary

     The purpose of this paper is to analyze the initial public offering process (IPO) of Google and value Google’s shares by assessing the effectiveness of some major valuation approaches. This report applies methods of comparative analysis, quantitative analysis, a combination of theory and empirical analysis.

     The paper is organized as follows: the first section states the motivation of Google’s IPO; The second section compares the respective ownership structures for both Google’s and Facebook’s IPO; the third section explains the market conditions for Google’s IPO. The fourth section conducts an in-depth analysis of the accuracy and applicability of 3 major valuation approaches. The fifth to seventh section analyzes the first-day returns, post IPO prices and market valuations following the IPO, respectively.  Eventually, the final section presents our expectations for the price of Google in the next year and thereafter.

     This paper finds that among the three valuation methods, Indications of Internal Company Valuation is the relatively appropriate approach. We expect Google’s share price to rise in the future based on analysis of the trend of several key factors such as earnings per share.

Why Go Public?

     Google became the largest search engine in 2000. In the first quarter of the same year Google had a real breakthrough which was the introduction of advertising product. In Exhibit 2 of “The Google IPO”, Google’s share of search market continuously grew from 10% to about 44% during 2001 to 2004. In Exhibit 5 of “Preparing for the Google IPO”, it showed Google had the largest market share of the global online search market in 2004 which was 56.4%. The difference between these two results might be the result of using different methodology behind them. Under this condition, Google needed to expand which means that Google needed more capital, either issue more debt, or get more leverage.

      Google was facing both challenges and opportunities. One of the challenges is the intense competition, that the company recognized the “Microsoft and Yahoo may have a greater ability to attract and retain users than we do because they operate Internet portals with broad range of products and services.” Because of this statement, the company needed to dominate the search market in order to keep the market leader position, which means more money is needed. Another challenge was that the company management team wanted to keep control of voting rights and raise money at the same time. The third challenge was the timing to go public. The dot-com doom in 2001 to 2003 crashed many Internet company, the number of IPO was falling dramatically, but in late 2003, the market was recovering. The forth challenge was going public with an undervalued price. The fifth challenge was that the growing number of Google shareholders would triggered disclosure, so the private ownership’s informational advantage would vanish. The solution of these challenges was a dual-stock structure “modified Dutch auction” IPO in late 2004, and these Class B shares had no voting rights. Class A stock were owned by the company’s management team, business angels and employees. “Modified Dutch auction” means that investors bidding at or above the clearing price would be entitled to receive shares at the clearing price. The intention of this style of offering was to avoid underpricing and overpricing. A dual-stock structure let the executives to keep control of voting right and go public at the same time.

    The opportunity of the company was the great timing to expand and take more leverage. The market was recovering, the company’s financial stamens were strong. In Exhibit 7 consolidated Statements of Income, the company had a rapid growth rate in revenue from 2001 to 2003. Annual revenues grew from $86 million in 2001 to $1446 million in 2003. Net income increased from $6,985,000 in 2001 to $105,648,000 in 2003. In 2004, the company had a record high revenues and net income. In Exhibit 8, it shows that the company had a stable growth on net cash provided by operating activities. In Exhibit 6 Consolidated Balance Sheets, total asset, total stockholders’ equity growing rapidly from 2002 to 2004. All this information is the indications of the healthy financial condition before its IPO.

Ownership structure

Google learned from buffet to implement a dual-stock structure, dividing Google’s shares into two different Class: Class A common stock, which commanded only one voting right versus ten voting rights for Class B. The two classes of shares, however, were to enjoy identical economic rights. In addition, Class B shares would automatically convert to Class A upon sales or transfer, which means that there would be no market for class B shares.

Current management and directors alone had over 60% of beneficial ownership and 63%of voting power. However, after the IPO, they would own 38% of the shares but 60%of voting power.

This structure would not only obtain financing but also keep control of voting right safely in the hands of Google management. It means that founders and initial investors have the ability to control the outcomes if matters submitted to Google’s stockholders for approval. 

Compare with Facebook, there are something differences in scale, price and right to the management about IPO. First, Facebook sets price higher than the value of stock, because it’s purpose of IPO is to let original investors withdraw money through financing. However, Google sets price almost equal to the value of stock (about$85 per share), because we do have enough money for daily operating activities, and financing is not our major reason for IPO.



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