Google Ipo

1.Why Go Public?

By 2004, the growing number of Google shareholders would have triggered disclosure, so the informational advantage of private ownership was no longer sustainable.

Google is a creative company, it has a lot of innovation products like the online shopping tool Froogle and the Google Toolbar, and now Google is launching Gmail to challenge Yahoo and Microsoft's Hot mail. All these innovations need a lot of money, via going public, Google can get more money to focus on innovation.

Going public is both a challenge and an opportunity. On one hand, Google can get more money for its operation and investment. For the other thing, Google would be supervised by SEC. Google may need to observe regulation. On the other hand, Google will get a large sum of money, so Google will be more competitive than its competitors.

2.Ownership Structure

Google used an innovative IPO method, which called dual-stock structure. In this approach, Google's stock is divided into two types, one is A Class, the other is B Class. A Class stocks which are owned by the company's executive officers, directors, business angels and employees have ten voting rights per share, B Class stocks have one voting right per share.

According to Exhibit 2, Google executive officers and directors has A very large proportion of shares, under dual-stock structure, Google can make sure that its core has control to the company, this structure allows Google to go public, yet think private.

3.Market Conditions

Market was recovering from dot-com doom from 2001 to 2003. The first couple of months of 2003 were marked by one of the worst IPO droughts in history, featuring a paltry four new issues. However, a mere 12 months later, the first quarter of 2004 saw no few than 32deals (including 11 technology issues). With rumors of a coming IPO by Google, the market reverberated in the last months of 2003.

There were two groups remarking upon Google's case. Several analysts claimed that going-public of already profitable technology companies would herald the dawn of a "bigger, better tech boom" undisturbed by the excesses of 1995 to 2000. The others sounded warning bells over the far-fetched valuation.

It was an appropriate time for Google to go public at 2004. First, the impending IPO would have lightened the hearts of long-suffering Wall Street. Investment banks may be more positive to get the case, and to try their best to sell a good deal.

In addition, the market went through a depression in 2001 to 2003, the recovery was just beginning under way, investors need an opportunity to reinvest in capital market urgently. Finally, as a profitable company, Google has already proved its ability to keep earning and innovation, it is easy to be accepted by the market.

4. What was Google Worth and Why?

There can be several approaches to value the issuance price for Google. First is the comparison method. When we compare the financial statement between and Google Yahoo, another Internet company with a similar business to Google's, we need to pay attention to their different accounting choices. As for the recognition of revenue, Yahoo and Google treat revenue from small-text advertisements that they place on other companies' Web sites. While Yahoo counts as revenue the "gross" amount it is paid, Google, counts as revenue only the "net" amount remaining. For example, if both ads generate $5 in revenue with $3 going to the publishers, Yahoo would count $5 revenue and book a $3 expense. But Google would record only $2 in revenue. In addition, Google decided to reassess the value of stock options. The recognition of an expense for underpriced options reduced Google's net income by more than half from what it otherwise would have been. As we can see, the different accounting choices can result in very different financial results, which may confuse the investors.

At the beginning of 2004, the price of yahoo stock was $22.51. When we use the comparison method of P/S using gross revenue, P/S using net revenue and P/E respectively, the valuation of Google stock can be $98.57, $81.26 and $72.62.

Second is the future cash flow valuation method. First, with the expected rate of return being 10%, we the assume that the company can maintain a profit margin (EBITDA margin) of 40%, virtually unchanged from last year's 41%, for the next five years. And we assume that Google would have to increase its yearly revenue to $5.5 billion by 2008 from 2003's $962 million -- a compound annual growth rate of 42%, which is incredible but not unbelievable. Then we can get the valuation of the Google to be $25 billion. However, Google, in its registration statement, said that it expects its margins will deteriorate as revenues deteriorate, expenditures increase and competition heats up. If we instead made the assumption that Google's margins will deteriorate over the next five years to 28%, Google must increase revenue at an annual rate of 59% to get the valuation of $25 billion. Further, Google's more conservative revenue-recognition method may imply higher-than-yahoo margins. In this case, the company must grow at 52.1% per year for the $25 billion valuation.

　 Revenue growth Profit margin

1 42% 40%

2 59% 28%

3 52.10% 33%

Third is internal company valuation. In one way, since Google added $75.4 million to its deferred- compensation account during the first quarter, the excess value of the options can be $75 after dividing $75.4 million by the slightly more than one million options Google issued during the first quarter. Finally, Google valued its shares at roughly $91 by adding the average exercise price of $16.28 to the option price of $75.

On one hand, since there are such differences accounting choices as gross and net income and the recognition of stock-compensation expense, the comparison method is not proper for the valuation of Google's stocks. On the other hand, we cannot know the reasonability of internal company valuation by Google itself. Therefore, the future cash flow valuation method can be the best one despite of the uncertain revenue growth and profit margin.

5. First day returns

The share price of Google-the