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.

makes Google’s IPO unique
n The
Dutch auction method of selling shares via bids. Though this creates
an equal platform for retail and institutional investors, it might
end up causing share prices to plummet when trading begins.
n A
dual class structure where Class B will hold nine votes more than
Class A shares. No prizes for guessing that most of the Class B
structures will remain among Page, Brin and CEO Eric Schmidt so that
they can continue with the ‘triumvirate’.
n Their
SEC filings itself, with the open letter from Page and Brin, the
unusually long list of risk factors and the clear undertone that
this is one IPO which will not bow to Wall Street.
n The
excitement that the IPO has unleashed is only comparable to Netscape
Communication’s IPO way back 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

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

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