Google

IPO Policy

IUJ, Spring 2006
Pham Thi Thuy Ha

Google’s Business:

Google is an American-based internet company that provides 75% of web
searches in the U.S and has a large share in international markets. Its major business is paid-listing, business model that generate revenues by collecting fees of ads on web search engines. Google’s main paid-listings have 2 categories: Premium Sponsorship based on cost-per-click and Adwords based on click-through-rate. Google introduced Search by Location which focuses on contextual and local advertising in 2004.

Strategic threats to Google:

- Strong competition: main competitors such as Yahoo, Microsoft and MSN were investing heavily in in-house search solutions and develop new search technologies.
- Uncertain partnership: Google relies heavily on the partnership with AOL. If this partnership is broken, Google will lose a significant share of revenues.
- Business risk: the transparency of Google’s business is very risky because internet business has no real long-term entry barrier.
- Unsustainable growth: Google’s leadership position in web searches is unsustainable.

Benefits of going public:

- Access to increased funding: a successful IPO creates immediate access to the public market where a firm can get needed funds easily.
- Enhance profile and market leverage: public companies and their products draw much media attention than private companies, thus they have many more chances to get public awareness of their companies and products.
- Increase investor appeal to institutional investors locally and internationally: increased recognition of the company may stimulate greater interest in the company’s shares
- Greater employee commitment and recruiting ability: incentives such as stock options, directed shares programs can increase employee commitment and attract talents.
- Shares as a source of finance: a company gone public can use its common shares to finance acquisitions of other public or private companies.
- Liquidity for shareholders: shareholders can sell their shares easily through stock markets.
- Definitive valuation benchmark: public companies can finance acquisitions through exchanges of stocks.

Costs of going public:

- Spread or underwriting discount: the difference between the price the issuer receives and the price offered to the public.
- Other direct expenses: costs incurred by the issuer that are not part of the compensations of underwriters (investment banks). These costs include filing fees, legal fees and taxes.
- Indirect expenses: these costs are not reported in the prospectus and include management time on the new issue
- Abnormal returns: in a seasoned issue of stock, the price normally drops upon the announcement of the issue. Therefore, new shareholders are prevented from buying overpriced stocks.
- Under-pricing: for IPO, the stock rises after the issue date. This is a loss for the issuing firm because the stock is sold at lower price than its efficient price in the aftermarket.
- Green Shoe Option: the right given to underwriters to buy additional shares at the offered price to cover over-allotments. This is the cost to the firm as the underwriter only buys additional shares when the offered price is below the price in the aftermarket.

Roles of investment bank in IPO process:

- Provide advice
- Market securities
- Underwrite the IPO process
- Determine the correct offering price
- Accept the risk that the market price may fall between the date the offering price is set and the time the issue is sold
Earning of investment banks through IPO process:
- Under the best-efforts method, investment banks do not purchase securities from issuing firms and sell them for profits but act as an agent to sell a firm’s securities and receive commission for each share sold. In other words, investment banks’ revenues are commissions gained from helping an issuing firm to sell their securities

Reasons for Google to go public:

- Need to maintain the leadership position in web search business
- Need to be much more competitive, flexible, fats-response and dynamic in the market
- Need to develop new web search technologies to compete with its major competitors: MSN and Yahoo
- Need to develop new business and invade untapped markets
- Need to diversify its services by contents, communications tools, images, search sites…
- Need to market its products, develop brand awareness and invest more in R&D
All these activities need a lot of money so the best way to get funds is to go public. Google can take benefits of going public mentioned above to achieve its business plans.

Success of IPO in the long run:

IPO will be successful because Google can meet the expectations of its investors since it has:
- A good execution of business plans: for the purposes of an IPO, Google has already a comprehensive roadmap that defines and assesses its growth prospects: its products, markets, competitive arena, business strategies, capabilities and growth objectives to bring benefits (shareholders value) to its investors.
- Advantages in technologies and brand awareness: Google holds enormous traffics, solid engineering experience in web search engines.
- Distinctive competence: Google has capacity to develop superior search solutions and new products to invade in untapped market.