Thoughts On The Google IPO Filing
from the IPO-different dept
Well, ever since Google filed their S-1 this morning, all the news seems to have turned into all Google, all the time. Obviously, there are plenty of other places covering the story, but after reading through the S-1, I have a few thoughts that may not be covered elsewhere. News.com has an excellent roundup of many of the Google IPO high points, but the S-1 itself is worth reading. The opening “owner’s manual” is very straightforward in revealing how the team at Google views the IPO. In some ways, it’s very reminiscent of the incredibly refreshing financial statements from Overstock.com, which remind you just how much misleading crap is shoved into most financial filings.
The decision to go with an auction model for the IPO isn’t a huge surprise (it was rumored last October). What is interesting, however is that they don’t seem to be doing it through W.R. Hambrecht, who is considered the expert in Dutch Auction IPOs. In fact, the filing hints at the fact that Google is making use of their own experiences auctioning off their advertisements in figuring out how to do this auction. That seems a little scary as (a) auctioning off ad inventory and IPO shares is quite different and (b) you always get a little worried when a company relies too heavily on their own experience in an area where they’re not experts. Still, the decision to review all potential investors to make sure they know what they’re investing in (possibly with a test of some sort) while banning anyone who looks as though they’re trying to game the system is a very smart move, and should help Google end up with more informed investors.
The folks on Wall Street must have very mixed opinions about this whole affair. They want Google to go public more than anything in the world, but the setup of this IPO is really designed to route around their usual (questionable) methods as much as possible. Still, since no banks wanted to miss out on taking the firm public, it looks like it wasn’t that hard to sign up the underwriters. There will be a few other interesting things to watch for as a result of this. Will other companies try to go public on similar terms, and will Wall Street allow it? Will they claim it’s a special case, or will this “educate” pre-IPO companies that they don’t have to play by the old rules. If that does happen, Morgan Stanley and CSFB could benefit by having the experience of running such an unconventional offering, while also acting as though they’re willing to avoid the silly Wall Street games.
The other item that’s worth noting is whether or not this structure actually works, or if the pressure really does become too much. From everything Google has done so far, I’m sure they believe that they can withstand the pressure. If anyone can, it probably is them. Reading through the S-1 you realize they put a lot of thought into how to structure this. However, the riskiest thing I see in the S-1 is the fact that this unconventional IPO is really designed to keep the power in the hands of Eric Schmidt, Larry Page and Sergey Brin. There are plenty of reasons why that’s good – because they’ve done a fantastic job so far, and they appear to function quite well as a team. However, it makes me question the succession plan and how the company continues to manage should any of the three leave. The structure they’re setting up is basically designed to work great, assuming the three of them all continue to work there. Should something happen to one of them, or should the working relationship falter, the company seems less well structured to deal with the change. Hopefully they are putting in place plans for such things, but it is still a risk. Overall, I’m impressed by the way they’ve put this together and I hope it works out well for them. It would be nice to see a company actually show Wall Street that the bankers are supposed to be serving the companies, and not the other way around. I hope it’s the start of a trend.
Comments on “Thoughts On The Google IPO Filing”
21st time's a charm?
I’ve done a lot of research on the use of IPO auctions in various countries. More than 20 countries have tried auctions at one time or another, and not one has stuck with it once issuers were given a choice [Japan and Israel forced issuers to use auctions for many years, but once they offered an alternative, Japan stopped immediately and it looks like Israel is doing the same, although their auction legislation just expired in Dec., 2003, so it’s too soon to tell].
Countries did not stop using auctions because of pressure from investment banks to use book building, the U.S. method. In most cases (except for France and Japan), they gave up on auctions to return to fixed price public offers, their traditional method, and book building wasn’t even introduced until years later. They tried auctions and stopped because auctions led to big aftermarket volatility. The idea that auctions price offerings perfectly, eliminating big positive (or negative) initial pops is pure nonsense. It’s not logical, and it doesn’t fit the data.
I hope this works well for Google, since I think they’re doing it for the right reasons. They’re doing all they can to discourage free riders, but who has an incentive to really do their homework in this system? The idea of online exams to encourage investors to read the prospectus is great – I’ve been suggesting it for years, since I heard that Net.IPO had done it throughout Europe (until Neuer Markt IPOs dried up).
There are examples of individual IPO auctions, even really hot ones, that have done OK. Hopefully Google will be less like Singapore Telecom and more like Argentina Telefonica (leaving another issuer to take the fall later, like Argentina Telecom which was auctioned 4 months after Telefonica). As for the method itself, in every country that has used IPO auctions, they quit once they became more familiar with the method. It’s not logical, unless you believe in a free lunch.
Re: 21st time's a charm?
The issue of “what happens when Eric, Sergey or Larry have to leave” was mentioned as one of the risks that Google Inc. faces. It’s probably Google’s weakest point, and the weak point of any company with unconventional aims. Unconventional-ness, by definition, is unique and therefore cannot be passed on. If they were not forced by circumstances to go public, I’d have said that they really shouldn’t have. There refusal to come up with revenue projections is, again, interesting.
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Seun Osewa