Goolgle’sInitial Public Offering
Googleis a brand name of the leading search engine in the world. Besides,it is a publicly traded multinational company with various types ofenterprises such as internet analytics, advertising technologies,cloud computing, web applications and browser and operating systemdevelopment. Two Ph.D. students, Sergey Brin and Larry Page, atStanford University, founded the company in the year 1998. Google’sconversion from a private enterprise to a public traded companyoccurred on August 19 the year 2004 (Weinberg, 2004).
Theconversion process followed by Google is referred to as the Dutchauction process or the Dutch Initial Public Offering. The process isdifferent from traditional Initial Public Offering (IPO) processesthat are adopted in most cases. In a traditional offering, thepricing of shares is handled by investment bankers. The investmentbankers represent the selling company. Consequently, the pricing isdone through a process that does not involve the public. Theinvestment bankers and their major clients such as institutionalinvestors carry out the pricing of shares during a traditionaloffering process. Besides, the investment bankers receive 7- 10percent of the proceeds from an IPO as an incentive to get the higherprices for the selling company. Normally, the incentives tend tobenefit the long-term clients of the investment banks (Choo, 2005).
Incontrast, the auction process represented a unique online auctionformat that used a system developed by Morgan Stanley and CreditSuisse. The company managed the conversion process by firstannouncing how many shares it intended to offer to the public.Second, it allowed any willing buyer to bid the quantity as well asthe price at which they are willing to buy the shares. For example, awilling buyer could bid that they are able and willing to buy 1000shares at a price of 200 United States Dollars. Third, the company’sauctioneers arranged the shares by ranking them from the highest tothe lowest. Fourth, the auctioneers worked backward from the highestbids to the lowest bids. Consequently, the shares were sold to thehighest price bids within the limits of prices that closed the marketon the day of the public offer. Finally, it allowed the buyers to payfor the price of the bid that cleared the market during the InitialPublic Offering (Perlman, 2015).
Inthe effort to improve the public image before an IPO, companies, andtheir investment bankers spend time traveling from city to city. Theaim is to make presentations, create awareness to the public andinstitutional investors as well as answer the company’s IPO-relatedquestions. Similarly, Google and its two investment bankers traveledto various cities. However, they were unable to provide answers to amajority of the questions about Google’s future and its expectedprofitability. Consequently, the company was unable to win thebenefit of doubt from the investors. The inability to provide a solidjustification contributed to the under pricing of the shares, due tolow demand, from an expected range of 108-135 to only 85 UnitedStates Dollars.
Duringthe initial processes of the IPO, Google engaged investment bankersto assist in the conversion process. Specifically, the companyengaged Morgan Stanley and Credit Suisse group to carry out theunderwriting processes. Google bargained with the companies to lowerthe underwriting fees from the normal charge of 4% paid by amultibillion-dollar IPO to 2.8%. However, the company decided to usethe Dutch process due to some factors. First, it needed to breakfrom the frequent use of the traditional method as used by companiesin the Silicon Valley. Besides, the company demanded to use its keyadvantages that would maximize the effect of the auction method. Suchadvantages entailed its strong and widely recognized brand and abroad customer and user base. Consequently, there was the potentialto publicize its IPO to a large pool of investors by using theauction process. The founders—Page and Sergey supported the use ofthe public auction. They claimed that their choice of the method wasfrom their desire to open up the investing opportunity to the public.Specifically, they aimed at enabling the average investor toparticipate in the initial offering that is not possible using thetraditional method (Hansell, 2004).
Thetraditional method places priority on investment banks, mutual funds,and other large investors. In contrast, the auction method places theaverage investors on par with the large investment groups. Besides,the founders specified their need to appeal to their customers, usersand potential investors. They stated that Google was not aconventional company, and they did not intend for the company tobecome one. They also emphasized their quest for a challenge that ledthem to provide unbiased, free access and accurate information forthose that rely on the company’s services in the whole world(Ritter, 2014).
Themajor beneficiaries from the auction method were the company itself. First, the method secured substantial amounts of revenues from theIPO. The company expected a lower price due to the bursting of thehigh technology bubble. The burst of the bubble was accompanied by agreat drop in the value of shares of companies such as Yahoo.Consequently, the price of the IPO was expected to be lower but theauction method created competition by allowing more interestedparties to participate. Second, the company’s inability to answerlarge investors’ questions during the presentations in the cityimplied that the company had reduced the interest of such investorsfrom participating. Consequently, the use of the auction methodcreated more room for additional interested investors. Third, themethod was a unique way of strengthening its unique reputation. Thestrategy served as an indicator that Google was not a conventionalcompany, and consequently it did not deserve the conventional ways offinancing its operations. Besides, the strategy assisted the companyto avoid the possibility of under pricing by the underwriters (Kuhn,2011).
Besides,the use of the auction process led to the reduction of costs ofraising capital. Specifically, the auction process led to a paymentof 2.8% of the IPO value compared to the required 7- 8% required inthe traditional method. The success of Google’s auction methodraises the opinion that although the use of underwriters reduces therisks of raising capital, it is more expensive. I am of the opinionthat underwriters are important in the IPO process however, theirinvolvement should be used sparingly. The underwriters have thecapacity to lower the net proceeds from an IPO due to the underpricing experienced under the traditional method and increasedchances of higher fees of the IPO processes (Solomon,2013).
Investmentbankers are important players in the initial public offeringprocesses. They provide the flow of funds from providers of capitalto the users of capital. They bring together the individuals withmoney to invest and those with investing opportunities. The choice ofan investment banker is crucial to the success of any initial publicoffering process. Besides, as a partner in the IPO process, theinvestment banker becomes an important business partner in the futureof the company and specifically in other forms of IPO’srequirements that the company may require. Consequently, it isimperative for companies longing to issue IPOs to spend aconsiderable amount of time in selecting the most appropriateinvestment banker (Weinberg, 2004).
First,the standardization of the underwriting agreements calls for theselection of an investment bank that has the understanding of acompany. Consequently, the underwriter can convey the interests ofthe company to the investors. It is important to include law firms inidentifying the specific investment banker that has the bestunderstanding of the company. The reason is that law firms haveexisting relationships with investment bankers that can drive theinvestors in the required direction (Choo, 2005).
Thefirst step is to know the focus of the industry of the company.Investment banks often deal in specific industry areas. Theappropriate strategy, therefore, calls for the identification ofinvestment banks with experience in conducting IPOs in the company’sindustry. Upon the identification of the various investment bankerswith experience, the company should then rank the bankers accordingto their reputation and choose the best banks. The ranking should beconducted based on the ability of the bank to complete the dealseffectively based on their experiences. The effectiveness of thebanks creates reputations to various investors and consequentlyincreases the possibility of attracting the best investors in theindustry. It is also important to evaluate the investment banksability to convey the client’s stories to the investors and theirsubsequent outcomes to determine if they are a good fit for thecompany’s strategy (Perlman, 2015).
Second,the company should understand the nature of analysts in theinvestment banks. Although the rules prevent any form of directcontact between the company and research analysts, the work of theanalysts determines the outcome of an IPO. Specifically, the analystsshould have a good grasp of the company’s story. Consequently, theyshould be able to convey the company’s message to the investors.The knowledge of the company’s story among the analysts determinestheir ability to convey the message and convince the investors. Thecompany should hence investigate the offerings made by the analystsin the past. Besides, it is important to evaluate the past work ofthe analysts in similar companies. The analysis of the historyaugments the determination of the understanding that the analystspose about the company’s industry and how their views aretangential to the company’s line of business. Although a companycannot change the thinking of the analysts, the understanding ofanalyst’s thoughts indicates whether the IPO will be successfulfrom such thoughts (Hansell, 2004).
Third,the IPO companies should obtain enough information from companiesthat have undergone the process in the past. It is important to getadvice from clients of various investments banks to get theiropinions about the outcome and the ability of the bank to make theprocess a success. The need for expertise is important in cases wherethe company lacks previous experience with the various investmentbanks through funding. Besides, companies that have undergone theprocess are likely to provide important advice on relevant issues toconsider during the process to ensure success. Besides, the companyshould seek to understand what to expect (Ritter, 2014).
Fourth,the company should consider personality with the various investmentbankers. The issue about personality emerges after the company hasshortlisted the most appropriate investment bankers based on theirreputation and experience in the company’s business sector.Personality calls for the company to evaluate how they get along withthe various bankers. Consequently, personality serves as adeterminant of how fit the investment banker is to the company’sIPO process. The need for a good fit emerges due to the varyingnature of investment bankers and the management of firms concerningstyle and temperament. The evaluation is done through a bake-offinterview. The investment bankers are asked to state why they are thebest suited to lead the company’s IPO. The assessment provides anindication of how well the bankers understand the company’sbackground as well as the history of the investment bankers. Theprocess enables the company to identify a bank that well matches withits expectations from the IPO and the required interactions (Kuhn,2011).
Finally,the company should think regarding the long term. Although the IPO isthe first experience with the specific investment banker, it isprobably not the last. Consequently, the company should choose a bankwith the intention to create a long-term partnership. The investmentbanker becomes the company’s partner as a public organization. Theability to stick to a given investment banker is important in savingthe company the strain of undergoing the selection process in case ofa similar incident in the future. Consequently, there are variouscharacteristics of a good investment banker (Solomon,2013).
First,the investment banker should be well experienced in the field ofIPO’s. Specifically, the bankers should have a history ofsuccessful IPOs in the business line related to that of the company.Second, the investment bankers should have well-experienced analysts.The analysts should have the ability to provide information toinvestors and specifically, the analysts should have experience inthe company’s line of business in the past. Third, a goodinvestment banker should emanate from the recommendations made by thepeer companies. Fourth, a good investment banker should be in aposition to provide personalized services to the company. The bankershould have the ability to relate to the company concerning style andtemperament. Finally, is the ability to create a long-termrelationship with the banker.
Theinitial offering price for the share of Google was determined to bewithin a range of 108 -135 United States Dollars. The IPO offered19,605,052 shares at a value of 1.67 billion United States Dollars.The initial market capitalization was 23.1 billion United StatesDollars. The value was determined by the relationship between thevalue of the assets and the future expectations of the company overthe number of shares to be issued on the IPO. The price of the sharesduring the IPO was reduced from the range of 108-135 to 85 UnitedStates Dollars due to the expected low demand from various events.First, there was a burst of the high-tech bubble that resulted in adecline in the share price of similar companies such as Yahoo andsecond, due to the inability to convince potential shareholdersduring the presentations (Weinberg,2004).
Afterthe involvement of an investment banker, the shares of Google wereobtained through a five-step process. First, there was thequalification stage where investors obtained a bidder ID fromwww.ipo.google.com. The second stage entailed bidding where investorssubmitted their bids through one of the underwriters between MorganStanley and Credit Suisse. In bidding, the investors were required tospecify the number of shares they were able and willing to buy andthe specific price they were willing to pay (Choo, 2005).
Thefourth stage entailed the closure of the auction process. The rightto close the auction was reserved with Google. However, the investorswere allowed to modify, withdraw and reenter their bids until theywere accepted in the auction. Fourth, the bidding process generated aclearing price to the investors of class A shares in the auction. Theclearing price represented the highest price at which all the offeredshares could be sold at the auction to the investors. The final stepentailed allocation. Upon the determination of the IPO price, all thesuccessful investors received an allocation of the shares at the IPOprice. Google and the underwriters were responsible for determiningthe maximum share allocation (Perlman, 2015).
Ifeel that Google’s conversion into a public traded corporation wasa wise decision. The benefits of going public outweigh thedisadvantages. First, it provided the company with capital to boosttheir ability to compete with various technology giants such asMicrosoft and Yahoo. The benefits of publication of the companyaccrue to the employees, the owners, and the shareholders. The ownershave the ability to expand the company by raising more capital fromthe markets. The employees may get better salaries from extendedexpansion with more profitability (Hansell, 2004).
Similarly,the investors have the potential to get more return from theprofitability of the company. The key disadvantage of publication isthe possibility of overlooking the key strategies for the success ofthe company in the past. The management may pay more concentration tosatisfy the investors at the expense of sustaining growth. The resultis reduced efficiency and competitiveness of the organization.Consequently, it is a wise investment strategy to obtain sufficientcapital for expansion purposes as compared to obtaining a bank loanfor expansion purposes (Weinberg, 2004).
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