Wall Street Curse—Winning!!

The first line of the open letter from Larry Page and Sergey Brin, written as

part of their S1 filings, also says that Google ‘is not a conventional company’.

One could not agree more. The organization, formed in 1998, has grown to become

the lord of the web search jungle and has never believed in mergers. Right from

the way it treats its employees–20% of every employee’s work time in the

company is set aside for their pet projects–to the success it made of search

with key word based advertising, Google has never been anything but unique.

And Google’s IPO is no different. Announced by way of its SEC filings on

April 29, the IPO, which plans to raise $2.7 billion, has built a virtual storm

of sorts with people from the industry and the media drawing comparitive lines

to the last big IPO of Netscape Communications in 1995.

The kind of furore that has been raised around the search engine’s imminent

IPO is unrivalled in recent history and one that most companies would kill for.

Theories on what will happen during and after the IPO are rampant and freely

available. Though the Indian IPO scene is witnessing a revival, the hype around

Google is something most home grown companies cannot hope to even light a candle

to. Not even TCS, whose IPO is expected by the end of 2004. Simply because there

are too many factors contributing to the bustle around Google. Some of it has to

do with Google’s legendary fame on the net and the fact that it is a classic

rags to riches story of its founders Page and Brin who are still charmingly

young and the innovative way in which Google plans to conduct the IPO.

The IPO will be conducted as a Dutch auction, over phone, fax and the

Internet, by underwriters Morgan Stanley and Credit Suisse First Boston, with

either of whom investors have to hold an account. This rarely used method

ensures an equal playing ground for small and retail investors. Google will also

have a dual class stock structure—Class A with one vote and Class B with ten.

No surprises then that only Class A stock will be made available to the public

and much of the Class B stock will be kept by Page, Brin and CEO, Eric Schmidt,

to continue with the ‘triumvirate’ and emphasize on long term goals over

short term ones.

Adding voice to the rising crescendo are Google’s finances opened for

public viewing with the filing. Not in the least bit disappointing. It had $106

million in net profits on revenues of $982 million in 2003 and first-quarter

2004 profits grew by 146% y-o-y to $64 million. If Google continues at the same

growth rate, it will touch close to $250 million as net profits for 2004.

But there are some doubts on that front. With its biggest rivals, Microsoft

and Yahoo, beefing up their search services, and Google’s attempt to expand

its services with its proposed Gmail still mired in controversy, growth is not

liable to keep the same rate that it has. Moreover, the IPO itself could come

with its share of problems. Since the auction will involve shares being bought

at prices closest to what people are ready to pay, no one will be ready to pay

more when the shares start trading. Investors then might start a spell of rapid

selling, resulting in plummeting share prices causing a classic scenario of ‘winner’s

curse’. Several have also expressed discontent over the dual class share

policy, which is rare in the US and practiced generally only by media companies.

For now though, the Indian retail investor need not worry his head too much

about it as Google’s shares cannot be bought by retailers located out of the

US.

For better or for worse, Google’s IPO has managed to create a fanfare,

excitement and expectation along with a strong feel good factor across the

industry globally, including the Indian industry, though they cannot hope to

have something as spectacular in the near future at least.

Sathya Mithra Ashok in Bangalore