Preparing for the Google IPO: A Revolution in the Making case study looks into the background and history of Google Incorporation. It also delves into the reasons why Google wants to do an initial public offering (IPO) and the steps undertaken by Google Inc. to minimize the cost of doing an IPO.
Didier Cossin; Dinos Constantinou
Harvard Business Review (IMD185-PDF-ENG)
November 26, 2004
Case questions answered:
- Briefly discuss Google’s background, including its ownership structure and startup financing choices, and the strategic threats it faces going forward.
- Comment on the potential reasons why Google wants to do an IPO. [I.e., what are the potential benefits of the IPO for Google?]
- Discuss and quantify (when possible) the costs Google will incur by doing the IPO. Please make sure to do a breakdown of these costs that includes estimates for the underwriting fee and underpricing costs and how each will vary depending on the final IPO price and what Google’s stock price is at the end of the first trading day. Also, make sure to discuss other costs that can’t be easily quantified.
- What steps does Google take to minimize these costs discussed in point #3?
- Do you recommend trying to bid in Google’s IPO auction? When making your recommendation, make sure to think about the reasons why Google might be doing the IPO and the specific features of the IPO that might make you more or less optimistic about how Google’s share price will perform after the IPO. For example, do some of the steps Google takes to minimize the IPO costs make you more or less likely to recommend investors bid? Finally, please remember to discuss issues related to asymmetric information.
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Preparing for the Google IPO: A Revolution in the Making? Case Answers
This case solution includes an Excel file with calculations.
Overview of Preparing for the Google IPO: A Revolution in the Making? Case Study
Google Incorporation was founded and initiated by Larry Page and Sergey Brin in the year 1998 after they met at Stanford University in 1995. Larry Page and Sergey Brin were Ph.D. Scholars in the field of computer science were enthusiasts to develop groundbreaking technology like a search engine.
Moreover, for the inception of Google, both the co-founders arranged one million dollars from friends and family, including business angels who provided early investments to businesses like Sun co-founder Andy Bechtolsheim.
Hence, this was the startup capital choice by the founders to initiate business activities. Soon after the inception of this organization, Google underwent a revolutionary increase in the number of queries searched through the Google search engine, which increased from ten thousand to 3 million search queries per day in the period from 1998 to 1999.
Furthermore, Google focused on equity funding of 25 million dollars, which was invested in 1999 in Google Incorporation by Sequoia Capital and Kleiner Perkins. Hence, the company became the largest search engine in the year 2000, administering more than 1 billion URLs and answering 60 million search queries per day.
The competitive threat for Google is from Yahoo and Microsoft, which emerged with the transformation in web-based technology and by acquiring large internet and advertising portals in 2003, just before the launch of Google’s IPO.
Preparing for the Google IPO – An Analysis of Google’s IPOs:
An Initial Public Offering (IPO) is beneficial for Google Incorporation because when Google was planning to enter the market through an IPO in 2003, the investment bankers and the market were craving for the internet companies to generate a new IPO.
This is the case because, after 2001, when internet companies were doomed, only very few IPOs of internet companies took place.
Furthermore, as Google Incorporation was a profitable organization with good growth prospects, the initiation of an IPO by the company would provide the company with huge capital that could be used to acquire other large internet portals and advertising portals (including advanced software for technological advancement) which would better assist the company to compete with Yahoo and Microsoft. Therefore, the IPO is beneficial for Google Incorporation in its growth prospectus so that the company can excel in its business while competing with its competitors.
Costs of IPO
The costs are related to the initial public offering, i.e., costs of issuing shares in the primary market, consist of two main components, which include legal, transaction, and banking fees, and losses because of the underpricing of the company’s share in the initial public offering.
Furthermore, the losses that occur due to the issuance of shares in the IPO are underpriced and related to the price of the share, which will be trading in the secondary market once the IPO takes place. Hence, these are the two main costs associated with the initial public offering.
The value of the company appears to be within the range of $25 billion to $50 billion, and the cost of investment banks that will underwrite and sell the share of the Google Incorporation to the investors will cost 2.76% of the share price that Google intends to sell.
Furthermore, the cost of loss due to underpricing can be estimated, but from the period of 1990 to 2003, it is recognized that the average increase in the price of the stock on the first day after issuance is approximately 24%, so it can be said that the loss of 24% is the cost of underpricing which the company could incur if the company issue its share in the IPO as underpriced shares.
Moreover, after considering the above percentage of costs and loss on underpricing assumptions, the costs, price of the stock at IPO, and the estimated share price on the first trading day are mentioned below.
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