‘Google is not a conventional company,’ reads the the company’s S1, which was filed with the SEC on April 29. And conventional is certainly not the route the company is taking with its IPO.
Google has chosen the Dutch auction method to list its shares on Nasdaq, which allows prospective investors to enter a bid for the number of shares they want and at what price. The deal’s underwriters then determine a clearing price at or above which the company’s shares are sold.
This isn’t the only way Google’s IPO stands out from the crowd, though. The company has also decided on a dual share structure involving class A and class B shares. The IPO involves class A shares that carry one vote per share. Class B shares will be held by Google insiders and carry ten votes per share.
Google-philes are delighted, claiming the Dutch auction allows regular investors to be a part of the IPO and the share structure will ensure Google is run the way its founders want. Google-bashers, however, claim this is no ‘IPO for the people’, and say Google’s principals have their own interests – and bank balances – in mind.
Whatever the rights and wrongs of it, no one can deny this IPO is a massive deal. From its Mountain View, California headquarters (called the Googleplex by insiders), the company’s 2,000 employees (‘Googlers’) operate the world’s largest internet search engine. Despite being just six years old, Google is one of the most famous companies worldwide.
As of August 18, 2004, it estimates its IPO share price will be between $85 and $95. The company slashed the price range on this date from a previous estimate of $108 to $135. At the same time, Google announced that because of the lower range fewer shares would be available to the public. This revised estimate lowers the value of the company, once listed, from a previous estimate of $33 bn to around $24.4 bn. As we went to press, the SEC was denying the company’s request for registration and wouldn’t say why but it’s assumed that regulators are still reviewing an interview that appeared in Playboy in early August. There is some concern the interview may have violated quiet period rules.
Opening up the game
In theory, Google’s Dutch auction will level the playing field for retail investors. The company created a web site for people to apply to participate in the auction, although everyone still has to go through one of the 28 underwriters. In the S1 shareholder letter, Google writes: ‘It is important to us to have a fair process for our IPO that is inclusive of both small and large investors.’
Many institutional investors, however, are not happy. ‘In a traditional IPO, it’s predetermined how big a tranche of shares is given to retail and institutional investors – this is not the case in the Google IPO,’ says Philip Kalmus, associate director of Nera, an economics consulting firm. ‘This Dutch auction method is being criticized by banks because they make less money in brokerage fees from retail investors than from institutional investors, so if fewer institutional investors obtain shares, the banks’ future trading revenues will be far lower. Banks are scared Google’s IPO will be a success and retail investors will be heavily involved.’
Some commentators are worried that not only will institutional investors be disadvantaged, but over-excited retail investors will also suffer by bidding too high, leading to a volatile initial trading situation, which could cause Google’s stock price to fall.
‘It’s a wonderful concept to give the little guy a chance, but in reality Google is playing games with how markets work,’ says David Menlow, president of IPOfinancial.com. ‘When you have a hot deal like this one, you completely rip out the sensibility factor and replace it with emotion – this is bubble mentality under a different name.’
Menlow doesn’t see this IPO benefiting mom and pop investors, either. ‘There is a strong likelihood the deal could become an unqualified disaster for retail investors, although the company will fare very well,’ he says.
‘The company is choosing a Dutch auction process primarily for its own benefit,’ agrees Scott Kessler, an internet equity analyst at Standard & Poor’s. ‘One of the reasons Google is embarking on this process is because it will yield the highest dollar windfall for the company.’
In its S1, Google warns that the hype surrounding its IPO could lead to its share price dropping after the offering. ‘We would like you to invest for the long term, and to do so only at or below what you determine to be a fair price… We think short-term speculation without paying attention to price is likely to lose you money, especially with our auction structure,’ the company writes.
The SEC is also cautioning retail investors. ‘There is less familiarity among the investing public with such a process,’ notes John Nester, an SEC spokesman.
Google, however, is defensive of its choices. In the S1, it explains its dual-class voting structure will make it more difficult for outside parties to influence or take over the company, and will ensure operational control remains with management.
The company is run as a triumvirate, with power split between founders Sergey Brin and Larry Page and CEO Eric Schmidt. Some commentators, however, are concerned about this structure. ‘This is a company run by a small group of people,’ notes Kessler. ‘What makes this more unique is those people have control over the company because of an ownership stake, not only because of their managerial positions.’
Institutional Shareholder Services (ISS) expresses a clear opinion of Google’s corporate governance structure in awarding the company a corporate governance quotient (CGQ) rating of 4.2 percent. ‘The Google IPO provides yet another example of an offering where governance risks are all but ignored,’ comments ISS in a written assessment. ‘The two classes of common stock give management control of the company, disenfranchising subscribers to the IPO … Betting on the founders could prove a huge gamble should the company encounter problems in the future. Investors will discover they have no ability to add to or change the management structure.’
As if in answer to this criticism, Google writes in its S1: ‘The shares of each of our classes have identical economic rights and differ only as to voting rights.’ Nevertheless, the company acknowledges this share structure might be unpopular. ‘We understand some investors do not favor dual-class structures,’ writes Page in the S1.
Building IR bridges
Google has stated it will not provide earnings guidance, either. ‘It is quite clear the company does not plan to adhere to Wall Street practices not mandated by securities laws,’ notes Kessler. ‘As well as not providing guidance, I don’t think Google will provide a lot in terms of financial metrics. With the S1, people were looking for detailed information, but there was more discussion of corporate culture than in-depth financials.’ Google’s pre-IPO roadshow was also criticized for a lack of information from management.
The Street might react adversely to the Dutch auction method post-IPO, warns Jonathan Johnson, vice president of corporate affairs at online liquidation company Overstock.com, which used a Dutch auction for its IPO in May 2002. ‘Before our IPO, a lot of the big banks came to us and said, If you use a Dutch auction instead of a traditional IPO, we’re not going to pick up coverage on your company,’ he says. ‘The banks have honored those threats and we have fewer analysts covering us than we might have if we’d gone with the traditional method.’
Overstock.com’s IPO raised $40 mn, just a fraction of Google’s predicted $3.3 bn, so Google is in a far stronger position in terms of attracting coverage. Even so, Google’s IR team may have to work harder at attracting and retaining certain sell-side analysts in the wake of its unusual IPO. Cindy McCaffrey, Google’s vice president of corporate marketing, is at the helm of those efforts. A 20-year veteran of IR and communications, McCaffrey responded promptly to requests for comment but could not participate given the company was in a quiet period as we went to press.
For his part, Kessler is already impressed with the company’s IR strategy. ‘Google is very oriented towards the notion of IR, and my dealings with it have been as constructive as with any company – and this is before I’ve even started covering the stock,’ he says.
As well as Google’s desire to welcome all investors to its IPO, it is keen to have a broad analyst base, Kessler adds. ‘The company wants to hear from as many analysts as possible, and it wants the widest array of information to be disseminated – it looks at relationships with analysts as positive,’ he points out.
Kessler does, however, acknowledge that the length of time the company has been in its quiet period is starting to test the patience of the investment community. ‘There’s frustration because there’s still no stock trading,’ he says. ‘It’s not necessarily the company’s fault, but it is trying to trailblaze and sometimes that can be a challenge in terms of getting things done and in terms of communication.’
Of course, the road less traveled is never easy. But Kessler points to things Google could do from an IR perspective that would help the investment community along the way. ‘To offset the lack of guidance and information it will be providing, the company could think about spending more time post-IPO educating its analysts on Google’s businesses, or talking more about its technology or its growth opportunities,’ he suggests.
Johnson thinks Google’s IR team will be flooded with calls from retail holders: ‘When you let in more retail investors, you have to expect a larger number of individuals calling the company with IR questions than if you just had analysts from hedge funds that own big blocks of shares.’
Google should use the quiet period to strategize its IR, notes Joe Muscat, partner at Ernst & Young. ‘Although the SEC has specific rules about the quiet period, firms should still make investments in IR,’ he says. ‘There are five factors we have found to be consistent in companies that outperformed the market three years after their IPO; one of those was having an effective post-IPO IR program in place.’
Betting on the future
Despite media hype, speculation on the Street and mocking by commentators – including one journalist pretending Google’s S1 began: ‘We’d like to build the world a home’ – people can’t help but predict good things for the company’s future. ‘Google is a stock the investment community hates to love,’ says Menlow. ‘We like the company; the only problem we have is its style of entry into the IPO market.’
Menlow unabashedly claims the Dutch auction is simply a way for Google’s founders to make more money. Others think the controversy over the auction entry is overblown. ‘In two or three years people won’t remember company A did a Dutch auction and company B did a more traditional offering,’ notes Muscat.
Johnson takes this idea further, claiming Google’s IPO could change the landscape of future IPOs altogether. ‘In five years people will look back and wonder why anyone ever used the traditional IPO method,’ he predicts.
As for Google, it has already demonstrated in all areas – including IR – that the company will unashamedly do its own thing. ‘By investing in Google, you are placing an unusual long-term bet on the team … and on our innovative approach,’ writes Page in the S1. Whatever happens, everyone’s watching.
Google’s underwriters
Morgan Stanley & Co
Credit Suisse First Boston
Allen & Company
Citigroup Global Markets
Goldman Sachs & Co
JP Morgan Securities
Lehman Brothers
UBS Securities
Thomas Weisel Partners
WR Hambrecht & Co
Deutsche Bank Securities
Lazard Freres & Co
Ameritrade
MR Beal & Co
William Blair & Co
Blaylock & Partners
Cazenove
E*trade Securities
Epoch Securities (distributed by Charles Schwab & Co)
Fidelity Capital Markets
Harrisdirect
Needham & Company
Piper Jaffray & Co
Samuel A Ramirez & Co
Muriel Siebert & Co
Utendahl Captial Partners
Wachovia Securities
Wells Fargo Securities
Source: Google
