Google's Dutch Auction Initial Public Offering

By Robicheaux, Sara; Herrington, Christopher | Journal of the International Academy for Case Studies, November 1, 2007 | Go to article overview

Google's Dutch Auction Initial Public Offering


Robicheaux, Sara, Herrington, Christopher, Journal of the International Academy for Case Studies


CASE DESCRIPTION

This case concerns the Initial Public Offering of Google, Inc. in August 2004. Instead of using the traditional best-efforts style IPO, Google used a Dutch Auction to allow small investors to buy in on the IPO. This case is intended to be used in an advanced corporate finance class. It can be taught in two hours of class time and should take about two to three hours of outside preparation by the students.

CASE SYNOPSIS

In August 2004, Google, Inc. took its firm's stock public for the first time using a Dutch auction process. This case study details the company's history as an Internet search engine company. Then it explains Google's initial public offering and the market environment in which Google was going public. The case concludes with questions for discussion.

INSTRUCTORS' NOTES

Overview

This case concerns the Initial Public Offering of Google, Inc. in August 2004. Instead of using the traditional best-efforts style IPO, Google used a Dutch Auction to allow small investors to buy in on the IPO. The case is intended to be used in an undergraduate corporate finance class. It can be taught in two hours of class time and should take about two hours of outside preparation by the students. The case concludes with nine questions students should address in analyzing this case. Below we will give some possible direction and answers to these questions although these are not meant to be the only "correct" solutions. Also, several of the questions involve the student doing research beyond what they read in the case.

Discussion Questions

1. Much controversy was centered on the whether or not both the IPO market and Google as a company were ready for the IPO. Did Google, Inc. make the correct decision by choosing to go public when it did? Explain why the move was or was not justified financially and circumstantially. Financial statements are provided in Tables 1, 2, and 3 for 2002-2004.

Even though the IPO market was not "hot" at the time Google chose to go public, it appears the market was ready to invest in Google. The post IPO performance of the company indicates that investors anticipate great things from Google. Nine months after the IPO the stock was trading at 2.7 times the offer price which is very unusual. Unlike many dotcom IPOs of the late 90's, Google actually was a profitable company with positive net income and cash flows.

2. One major complaint of potential investors was that Google was not specific enough in explaining how the money from the IPO would be used. Explain why this is or is not a justified grievance, and detail some of the options Google should consider for spending of the IPO capital. Which option is most promising?

Discuss why companies do not want excessive amounts of cash on hand. What are the advantages & disadvantages to cash? Also discuss why IPOs are beneficial to companies.

The Google IPO brought in 1.67 Billion dollars. This is a large amount of cash and the company needs to be able to explain how they plan to spend/invest this cash. Some of the cash was used to pay off $201 million in settlement disputes with Yahoo. In order for shareholders to buy shares in Google they must anticipate that Google will be able to generate the same or higher returns than they could earn elsewhere investing in a similar risk company. Google needs to be able to articulate to their investors how they are going to generate returns on their investments.

There are unlimited possibilities of what Google could do with the proceeds from their IPO. Some possibilities: they could acquire smaller technology companies, hire more employees, increase compensation of existing staff to retain the talent they currently have, develop new products (e.g. customized home pages which they released in May 2005).

3. One of Google's main intentions in using the Dutch auction process to price its stock was to get the most accurate price possible. …

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