Much ado about Google

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By:
Peter Koh
Published on:

Google's decision to use an auction for its IPO sprang from a desire to get what it regarded as a fair price, avoid post-issue upsets and offer fair investor access. Did it succeed in these goals and might it have done better had it shown more respect to its bankers?

The level of media interest in search engine company Google's initial public offering has been unprecedented. Not even Deutsche Postbank's IPO comes close, even though it was bigger, more complex, and more troubled. The German IPO has been mentioned in 125 articles in the Financial Times over the past year, fewer than half as many mentions as Google's, at 267.

Every event and non-event over the course of the deal has been so exhaustively documented that it is hard to see the forest for the trees. Is Google's IPO really that important? Was it a success or a failure? Will it have any influence on other companies IPO strategies? Despite the acres of newsprint none of these questions has been properly answered.

Google's IPO is important for one main reason. It is the biggest dotcom IPO since Barnesandnoble.com's $450 million deal in 1998 and the tenth biggest IPO so far this year. So it is an important test of appetite for new issues, particularly technology IPOs, and for how much investors, investment banks and issuers have learnt about dotcom deals.

The decision of Google's management and main shareholders to play such an active role in the company's IPO was motivated by an important lesson: that on Wall Street, caveat vendor applies as much as caveat emptor. Google wanted to avoid selling shares too cheap and to avoid the absurd post-IPO price behaviour most of its peers have suffered.

The fuss that many institutions made about the complications of Google's auction says more about the laziness of their fund managers than the system's merits. Some institutional investors, it seems, are perfectly happy to invest millions of dollars of clients' cash in an IPO but not if they have to invest a bit of their own time to read and understand a prospectus.

Was all Google's effort to do things differently worth it? The success of an IPO is best defined by how well it achieves the aims of the vendor, the issuer and investors. Google and its controlling shareholders had several aims. They wanted to get a fair price, give individual investors a fair chance to get allocations and, perhaps most important, to do everything on their own terms.

Google did not get the price it hoped for. It was forced to cut its price range by 26%, in line with falls in comparable stocks including Yahoo, and as a result the selling shareholders decided to reduce the number of shares they were offering.

Some investors accused Google of greed and said the initial price range of $108 to $135 was ridiculous. Independent equity analysts and S&P estimated a fair-value range of $121 to $127. It trades today at $108.30, up 27% from its eventual offer price, and within its initial price range.

No-one is saying it's overpriced now.

The strong aftermarket performance is the result of demand from investors who like the stock but stayed out of the IPO because they didn't like the way it was handled, says a source close to the deal. Had Google taken the traditional route it might have been able to bring in some of that demand and saved itself repricing and downsizing, he argues. Still, achieving a P/E valuation of 155 in this market can only be counted a big success.

Google said it wanted to give individual investors a fair chance to own its shares. The structure of its IPO meant that it did. The bookrunners declined to reveal the proportion of retail participation, citing quiet-period restrictions, but a source close to the deal says it was weak because the banks involved had no selling concession and so little incentive to sell. In fact, some underwriters are believed to have unofficially advised their retail clients to wait and see how the stock traded and to buy later when, coincidentally, their broker could make some money too.

Google didn't manage its banks well. By making its mistrust obvious and being too tight it failed to give them an incentive to work in its interests.

Google did succeed in doing things on its own terms ? not bad for a company with arguably the worst corporate governance in the S&P500. It did the IPO exactly as it wanted and paid all its 28 bankers a total gross spread of just 2.8%. Most issuers have to pay 7%.

Investors got a good deal. Google's post-IPO performance is so far a lot more impressive than many IPOs this year.

It is unlikely other companies will be so brazen in their first visit to the market. Few companies have the prospects or cachet needed. Others would do well to follow its example and get more involved in their own IPOs but would also do well to learn from its mistakes. For an issuer, the only thing worse than an overpaid banker is an underpaid one.