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104-109-1

ICMR Center for Management Research

The Google IPO

This case was written by Agrawal, E, under the direction of Dutta, S, ICMR Center for
Management Research. It was compiled from published sources, and is intended to be used
as a basis for class discussion rather than to illustrate either effective or ineffective handling of a
management situation.

2004, ICMR Center for Management Research

ICMR, Plot # 49, Nagarjuna Hills, Hyderabad 500 082, India

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 104-109-1

The Google IPO

"There are good IPOs, and there are great IPOs. The Google IPO is the rarest kind: one that draws
the white-hot glare of public attention."
- Marc Andreessen, Co-founder of Netscape and a public-offering expert, in March 2004. 1
"I would not be stunned if Google closes down. Internet search companies have been through the
ringer for the past few weeks. A couple of up days don't make a trend. There isn't a full-throttle
conviction behind this market."
- Brian Bolan, Analyst with Marquis Investment Research, in August 19, 2004.2
"It's certainly a success in that Google went public, and they did it the way they wanted to. But it
was a failure in the sense that they didn't get the price they could've gotten if they had gone through
the traditional method. And they did not eliminate the first-day jump."
-Matt Rhodes-Kropf, Associate Professor of Finance and Economics at Columbia
Business School, in August 20, 2004.3

INTRODUCTION

On August 19, 2004, Google went public and came out with its initial public offering4 (IPO). It
turned out to be the 25th largest IPO in corporate history and the biggest technology IPO5 till date.
Before its release, the IPO had been the subject of several controversies and the target of a lot of
criticism. In fact, Google too seemed to have felt threatened by the controversies and just a day
before it went public, it revised and scaled down its estimated per share price range from $108-
$135 to $85-$95 per share. The company also reduced the number of shares it had planned to sell
from 25.7 million to 19.6 million.
What was unique about the Google IPO was the unusual auction method by which the company
chose to sell its shares. Google used the ―Dutch Auction method‖ (Refer to Exhibit I) to sell its shares
because it felt that under the conventional IPO method, most small investors would be unable to
invest and the IPO would get limited to some large institutions, investment bankers, and their clients.
Most investment bankers had declared the IPO to be fraught with risk even before it was launched
and had said that the Dutch Auction method was too complicated for the average American who
―doesn't have the skills to analyze the business or the business prospect of a company going public,
whether its Google or not.‖6 Google took a remarkable risk by using an unconventional system and
it seemed to have managed to pull it off successfully.

1
Michael S. Malone, ―The complete guide to Googlemania,‖ Wired Magazine, Issue 12.03, March 2004.
2
Paul R. La Monica, ―Google goes low,‖ CNNmoney, August 19, 2004.
3
―Google Sets Possible Precedent for IPOs,‖ The Associated Press, New York, August 20, 2004.
4
When a company lists for the first time on the stock exchange, the process is known as an IPO, new share
issue or flotation. It is a way for companies to raise cash - and their profile.
5
―Google Sets Possible Precedent for IPOs,‖ The Associated Press, New York, August 20, 2004.
6
―Google Sets Possible Precedent for IPOs,‖ The Associated Press, New York, August 20, 2004.

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BACKGROUND NOTE

The founders of Google, Larry Page (Page) and Sergey Brin (Brin), graduated in computer science
from Stanford University in 1995. In January 1996, Page and Brin began work to extend their
summer project work on a search engine. They wanted to develop a technology that would retrieve
appropriate information from the vast amount of data available on the Internet. They named their
search engine ‗BackRub‘ because of its ability to identify and analyze ‗back links‘ that pointed to a
given website.
By 1997, BackRub had gained a lot of popularity due to its unique approach to solving search
problems on the Internet. Throughout the first half of 1998, Page and Brin concentrated on
perfecting their technology. To store huge amounts of data, they bought a terabyte of memory disks
(one trillion bytes equal one terabyte) at bargain prices. Page used his dormitory room as a data
center, while Brin used his room to set up a business office. By then, they had realized that their
search technology was superior to any other technology available. They started looking actively for
potential partners interested in licensing their search engine technology.
Page and Brin contacted many people including friends and family. One of the people they got in
touch with was David Filo (Filo), founder of Yahoo, a leading portal.7 Filo complimented them for
the ‗solid technology‘ they had built, but said he would not enter into any agreement with them.
Instead, he encouraged them to start their own company. The owners of many other portals also
refused to invest in their technology. The CEO of one such portal told them, ―As long as we are 80%
as good as our competitors that is good enough. Our users do not really care about search.‖8
During the late 1990s, the ‗dotcom fever‘ was at its peak in the US, and almost everyone was
opening a dotcom company. Though Page and Brin were not too keen on opening their own
company, they decided to set one up, since they could not attract any partners. However, they first
had to clear off the debts they had accumulated in buying the memory disks and to move out of their
‗dorm office‘. The duo put their PhD plans on hold, and began looking for a prospective investor in
their business.
Help came in the form of a faculty member from Stanford University who introduced them to Andy
Bechtolsheim (Bechtolsheim), one of the co-founders of Sun Microsystems. Bechtolsheim saw their
presentation and was impressed. Realizing its potential, he handed over a check of
$100,000 in favor of Google Inc.9, an entity that did not yet exist. Since Page and Brin could not
deposit the check in their accounts, they decided to set up a corporation named Google Inc.
Page and Brin somehow managed to collect another $1 million from their families, friends and
acquaintances, and opened their office on September 7, 1998. The office was located in the garage
of a friend‘s house in Menlo Park, California. The name Google, though chosen by accident,
indicated the company‘s mission to sort out and organize the immense amount of data available on
the web. The website www.google.com became operational and the duo recruited their first
employee – fellow Stanford student Craig Silverstein (Silverstein), who later became Google‘s
Technical Director.

7
A portal is a website featuring commonly used services as a starting point and a common gateway to the web
(a web portal) or a niche topic (vertical portal/vortal). The services offered by most portals include a search
engine, news, email, stock quotes, chat, forums, maps, shopping, and customization options. Large portals
include many more services apart from the ones mentioned above.
7
A portal is a website featuring commonly used services as a starting point and a common gateway to the web
(a web portal) or a niche topic (vertical portal/vortal). The services offered by most portals include a search
engine, news, email, stock quotes, chat, forums, maps, shopping, and customization options. Large portals
include many more services apart from the ones mentioned above.
8
www.google.com.
9
The name Google was derived from the word Googol, which denotes the number one followed by a hundred
zeros.

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It wasn‘t long before Google became popular among Internet browsers. In fact, even while it was
still in the beta stage (software‘s trial-run phase), Google was answering 10,000 search queries every
day. Its technology, which gave precise search results for queries, attracted the attention of the press
and articles on the website appeared in ‗USA Today‘ and ‗Le Monde‘ (leading US and French
newspapers respectively). In December 1998, PC magazine named Google as one of the top 100
websites and search engines for 1998.
In February 1999, Google shifted its office to University Avenue in Palo Alto, California. The
company increased its staff strength to eight and was by then answering 50,000 queries each day.
Google‘s phenomenal growth within this short span of time attracted many corporate customers, and
Red Hat10 signed on as its first commercial customer. Google also secured venture capital of $ 25
million from Sequoia Capital and Kleiner Perkins Caufield & Byers11.
Three new members, Mike Moritz (of Sequoia Capital)12, John Doerr (of Kleiner Perkins)13 and Ram
Shriram (CEO of Junglee)14, joined Google‘s board of directors in June 1999. Soon after, Omid
Kordestani (of Netscape)15 and Urs Hölzle (of UC Santa Barbara)16 joined as Vice President of
Business development/sales and Vice President of engineering, respectively. In the same year,
Google shifted its office to a bigger place at Mountain View, California, to accommodate the
increasing number of employees.
In 2000, Google introduced a wireless search technology for WAP phones and handheld devices. It
also launched 10-non English language versions of its search engine. It emerged as the largest search
engine in the world with its index reaching 1 billion URLs. Yahoo also selected Google as its search
engine. Over the years, Google added new features such as Google Number Search (GNS) and
Google Toolbar. It also entered into agreements with various portals and websites across the globe
to provide search results for them.
In 2001, Google acquired Deja.com‘s Usenet archive. In the same year, it launched country specific
domains with the launch of Google UK, Google Germany, Google France, Google Italy, etc. In mid-
2001, Eric E. Schmidt (Schmidt) (ex CEO of Novell) became the CEO of Google, with Page taking
over as President, Products, and Brin as President, Technology. In 2001, Google established
overseas sales offices in Hamburg (Germany) and Tokyo (Japan).
In the same year, Google launched an advertising program - Adwords – which placed text ads on
the right side of the search screen according to the users‘ search terms. The program was a big
success with advertisers. In February 2002, Google launched an advanced version of the Adwords
program called Adwords Select. In mid-2002, Google entered into a mutually beneficial agreement
with AOL. Under the agreement, Google provided AOL with search results and AOL placed banner
advertisements from Google on its website. Google also announced syndicated advertising
agreements with Ask Jeeves, InfoSpace.com, and AT&T WorldNet service. In late 2002, Google

10
Red Hat is the largest and most recognized provider of open source technology (Linux) in the world.
11
Sequoia and Kleiner Perkins are leading US-based investor companies that have financed companies such
as Cisco Systems, Apple Computer, Yahoo!, Linear Technology, Amazon.com, America Online, @Home,
Excite, Healtheon, Intuit and Sportsline.
12
Mike Mortiz was one of the partners in Sequoia Capital – a venture capital firm, which provides funding to
tech start-up companies. Sequoia Capital was one the venture capital firms which gave funding to Google
and they are among the shareholders in the company.
13
John Doerr was one the founding members of the venture capital firm Kleiner Perkins Caufield & Byers’,
which funded firms such as Compaq Computer, Sun Microsystems, and Amazon.com.
14
Ram Shriram was one of the co-founders of Junglee.com, which was sold to Amazon.com. He is also an
angel investor.
15
Omid Kordestani was vice president of Business Development and Sales of Netscape Communications Inc.
16
Urs Hölzle was associate professor of computer science at University of California, Santa Barbara. He quit
his job and joined Google as its first vice president (engineering).

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launched a product search engine (beta version) called Froogle. Froogle enabled users to search
various websites for products of their choice. The search results of Froogle produced images of the
products along with the price of the products sought.
In January 2003, branding consultant – Interbrand -- named Google as the Brand of the Year for
2002. By March 2003, Google reported that there were around 100,000 advertisers signed up for its
Google Adwords program. By August 2003, Google‘s country specific domains included Denmark,
Azerbaijan, El Salvador, Saint Vincent and the Grenadines, India, Malaysia, and Libya. By late
2003, Google‘s country specific domains increased to 82. In December 2003, Google announced
that it would come out with its IPO in early 2004.

“DUTCH AUCTION”: AN UNCONVENTIONAL MODE OF IPO LAUNCH

The Google IPO was one of the most awaited IPOs in 2004. As soon as the company made its
announcement that it would go public in 2004, investors, competitors, consumers and bankers, all
began waiting eagerly for the IPO to materialize.
However, Google‘s announcement came at a time when most technology firms‘ IPOs were not
performing well. In fact, IPOs in general did not perform well in the year 2004. (Refer to Exhibit II
for performance of some Technology IPOs in the year 2004). According to Dealogic17, a research
firm, IPOs in America in 2004 fell by nearly 4%. Many companies that had initially planned to go
public in 2004 withdrew their registration when they saw the poor performance of NASDAQ, which
fell by 16% between April 2004 and August 200418.
On the other hand, 2004 had been a very profitable year for Google. For the quarter ending June 30,
2004, Google recorded sales of $700 million, 125% higher than the previous year for the same period
and its profits equaled $79 million, 146% higher than the previous year19. (Refer to Exhibit III for
financial performance of Google for the years 2003 and 2004) Also, the paid search market on the
Internet was booming. It grew by 220% in the year 2003 and was expected to grow at a minimum
rate of 59% in the year 200420. Because of Google‘s excellent performance in the preceding years,
its IPO was expected to be highly successful.
But the announcement of the IPO was not received with much enthusiasm at The Wall Street. In
fact, most investment bankers expressed concern about the IPO and appeared to be very
apprehensive about it. Their concern could be traced to the fact that when Google disclosed details
of its proposed IPO in April 2004, it had announced that it would use the unconventional mode of
―Dutch Auction‖ for it. Many experts felt that the bankers would try to sabotage the IPO because
Google had chosen to ignore them21 by using the unconventional approach.
In the conventional mode of IPO launch, investment bankers have a major role to play. A company
that hopes to go public uses the services of Investment bankers to assess the correct value of their
shares and to manage the entire launch proceedings. For this, the bankers earn a fee, which is
generally 7% of the money raised in the IPOs (The Dutch-auction fee is only about 3 %.)22 Generally,
in practice, the shares are sold initially at a price lower than the one assessed by the bankers. Since
the bankers manage the launch proceedings, they first sell the shares at the

17
Dealogic was established in 1983 in UK and has offices in London, New York, Hong Kong and Tokyo. It
designs, develops and markets products specifically for the use of the Capital market industry. Its research
division, Analytics, provides information on global capital markets and corporate finance activity.
18
“Fear of floating,‖ The Economist, Vol. 372, Issue 8388, August 14, 2004.
19
Ben Elgin, “Google's IPO: Asking Too Much?‖ BusinessWeek Online, July 27, 2004.
20
Ben Elgin, “Google's IPO: Asking Too Much?‖ BusinessWeek Online, July 27, 2004.
21
Jason Kottke, ―Surowiecki on the Google IPO,‖ www.kottke.org weblog, August 20, 2004.
22
Olga Kharif, ―Not all Dutch Auctions are equal,‖ BusinessWeek Online, August 18, 2004.

5
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discounted price to their preferred customers, who can trade the shares the next day for a higher
price, earning a good profit in the process. This increase in the value of shares after the first day is
called the ―first day pop‖. Generally, the higher the pop for a company‘s shares, the greater the
prestige attached to the company‘s shares. Though this is the norm, experts say that a higher pop is
an indication of the fact that the initial pricing was incorrect and that the company could have easily
managed to earn more by selling the shares at a higher price23.
The conventional method of selling the IPO benefits the initial buyers of the IPO and the investment
bankers. The initial customers earn profits due to the ―first day pop‖ and the investment bankers earn
their fees and the goodwill of the initial customers. But the company that owns the IPO does not
gain much in the process. Another disadvantage of this system is that it largely ignores small time
investors. It is mostly the large institutions and big investors who are able to invest in a conventional
launch. Since 1999, out of the 700 companies that went public in the US, only nine chose the ―Dutch
Auction‖ method and Google‘s IPO was the largest of them all24.
Google had always stressed that it focused on its customers‘ needs and that it gave maximum
importance to its customers‘ satisfaction. Therefore, it wanted its IPO to be launched in a manner in
which most of its customers, if they wanted to, could also participate. Google did not want its IPO
to be limited to large institutions and big investors. According to Barry Randall, a portfolio manager
with US Bancorp, ―it is admirable that they (Google) want small investor‘s involvement.‖25
Google also made it apparent that it did not want to earn the unnecessary hype of ―first day pop‖. It
wanted to earn what the people wanted to pay for its IPO. This would maximize the returns for it.
But most investment bankers were unenthusiastic about the IPO and even predicted that it would be
a failure because of its improper launch. According to Matthew McCormick, a portfolio manager of
Bahl & Gaynor Investment Counsel, ―The people with the most to lose are the investment banks
— they owned this process and this (Google IPO) fundamentally changes their mousetrap. It could
cause them a little bit of heartburn.‖26 He felt that the reason the investment bankers were unhappy
with the IPO was that they were worried that if the Google IPO was pulled off successfully, many
more companies would like to try the ―Dutch Auction‖ method. In the process, the investment
bankers‘ roles would be eliminated. To its underwriters, Google had agreed to pay fees of merely
$2.38 per share, which was half the rate that would have been charged for a normal IPO27.
Google appointed William R. Hambrecht & Co28 as advisor and the firm also acted as one of the
channels through which individual investors could bid for Google IPO shares. Credit Suisse First
Boston (CSFB) and Morgan Stanley also co-led the deal for Google. Apart from this, Google also
launched a site www.ipo.google.com on July 30, 2004, where potential bidders had to register to
obtain a bidder ID. The bidder IDs were available for a week. The auction process itself was divided
into five stages – qualification, bidding, auction closing, pricing, and allocation.
Once a potential bidder‘s registration was approved, he had to submit his bids through one of the 28
underwriters. The bid had to specify the desired number of shares, a share purchase price, and any other
information that the underwriter may need to verify the authenticity of the bid. Bidders had to buy a
minimum of five shares per bid and they could submit more than one bid. The underwriters could be

23
Jason Kottke, ―Surowiecki on the Google IPO,‖ www.kottke.org weblog, August 20, 2004.
24
Ken Clark, “Gaga for Google?‖ Chain Store Age, Vol. 80 Issue 6, p98, 1p, 1c, June, 2004.
25
―Democracy and Control in Google's IPO,‖ BusinessWeek Online, April 30, 2004.
26
Gregory Crawford, “Dutch auction may gain popularity if Google's IPO effort is a success‖, Pensions &
Investments; Vol. 32 Issue 11, p3, 2p, 1c, May 31, 2004.
27
―Google Sets Possible Precedent for IPOs,” The Associated Press, New York, August 20, 2004.
28
Founded in 1998, WR Hambrecht + Co is a financial services firm in the US, committed to using the
Internet and auction process to level the playing field for investors and issuers.

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contacted through the Internet, telephone, fax, or in person. A bid had to be reconfirmed after submission.
Once the auction closed, Google and its underwriters would determine the IPO price based on the bids
received. The winning bidders would then be informed accordingly.

THE CRITICISM

Though Google tried to make its IPO available to small investors, most of the investors, especially
the small ones, found the entire procedure too complicated and time-consuming. Scott Kesler of
Business Week said, ―We consider the auction process somewhat complicated and time-
consuming, perhaps dissuading would-be investors. Seasonality, potential significant major news
events (that could serve as distractions), and the recent unfavorable climate for technology and
Internet stocks could also negatively impact the Google IPO's prospects, in our view. We expect
much of the investment community will not participate in the IPO process, owing to these risks.‖29
Thus, the IPO was declared a failure even before it was launched.
It was not only the Google IPO that came in for criticism; some analysts even commented that
Google itself was not a very strong company to invest in. Google had consistently performed well
since March 2002. There had not been a single quarter in which it had reported losses, yet many
investors declared it to be a risky venture. They argued that unlike Yahoo and Microsoft, which had
a whole range of products to offer, Google was primarily a one-product company. Its only
outstanding product was its net searching tool and ability. Although Google was a leader in this field,
they declared that it would not remain so because Yahoo and Microsoft were aggressively investing
in net search tools. Even in the field of advertising, which was the main source of revenue for Google,
the company was behind its competitors. The market predicted for the Google-style search
advertising was merely $2.8 billion compared to the market for the Yahoo style flashier
advertisements predicted at nearly $4.5 billion30. And since both Yahoo and Microsoft were
primarily strong and mature companies, they were expected to beat Google easily. Financial experts
at Susquehanna, leading investment bankers, said, ―We would expect Google would trade at a
discount to Yahoo.‖31
There was also dissatisfaction over Google‘s dual share system. Google had two kinds of shares –
Class A and Class B. Class B shares, had voting rights ten times more than the voting rights of Class
A shares. The founders together owned one-third of the class B shares32. In a letter to their
prospective investors that was released on April 29, 2004, Page and Brin defended the dual share
system saying: ―We have set up a corporate [dual-class] structure that will make it harder for
outside parties to take over or influence Google. Google has a responsibility to the world. The dual-
class structure helps ensure that this responsibility is met. We will not unnecessarily disclose all of
our strengths, strategies, and intentions.‖33
Despite Brin‘s and Page‘s efforts to defend the dual share system, most investors viewed it as an
attempt by the founders to retain control of the company. The dual share system had even earlier
been a highly contentious issue with investors, with most of them pushing companies to change to a
single class of shares with equal voting rights. Only about 10% of publicly traded companies
continued with this system of dual share structure34. Investors felt that such a system was opposed
to their rights and that it only went on to highlight that despite Google‘s claims that it would bring
out a totally fair IPO, it was not really so.

29
Scott Kessler,“The A-B-Cs of Google's Auction,‖ BusinessWeek Online, August 10, 2004.
30
Ben Elgin, “Google's IPO: Asking Too Much?‖ BusinessWeek Online, July 27, 2004.
31
Ben Elgin, “Google's IPO: Asking Too Much?‖ BusinessWeek Online, July 27, 2004.
32
Paul R. La Monica, “Google sets $2.7 billion IPO,‖ www.money.cnn.com, April 30, 2004.
33
Aaron Swartz, “April 29, 2004: Google IPO, Google Foundation,‖ http://google.blogspace.com, April 29, 2004.
34
―Democracy and Control in Google's IPO,‖ BusinessWeek Online, April 30, 2004.

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In April 2004, Google issued an ―Owners Manual for Google Shareholders‖ along with their
prospectus that contained the details of Google‘s IPO. Among other things, Google also mentioned
that it would not release any quarterly profit estimates to Wall Street. It felt that releasing quarterly
profit estimates put pressure on the company to meet the estimates, and that this would affect the
company‘s goals in the long run. But most investors were accustomed to assessing a company‘s
performance based on these quarterly estimates and the absence of the estimates put many of them
off. Ignatius L. Smetek, Chief Investment Officer of Arcataur Capital Management LLC,
Milwaukee, said that he was put off by the Google IPO because of the absence of quarterly earning
updates. According to him, ―For a company without a public record, that (the absence of quarterly
earning updates) could be a mistake.‖35
THE CONTROVERSY
In August 2004 the Google founders appeared for an interview with the Playboy Magazine, a week
before the IPO was to be released. This was a direct violation of the Securities and Exchange
Commission (SEC) rules, which required that a ―quiet period‖36 be maintained. SEC discovered
another discrepancy on August 17, 2004, two days before the actual auction was to begin. Between
September 2001 and July 2004, Google had issued 23.2 million shares and 5.6 million outstanding
stock options to employees and consultants37. However, it had failed to report these shares in its
registration with SEC. To make amends, Google had to buy back these shares. Google insisted that
there was nothing underhand in what it had done; it was just that the company had omitted to report
the shares. But speculation ran high that Google had purposely not disclosed the shares because of
the involvement of some illegal dealings. Google released a statement that said, ―If it is determined
that we offered securities without properly registering them under federal or state law, or securing
an exemption from registration, regulators could impose monetary fines or other sanctions as
provided under these laws.‖38 However, no improper dealings were discovered.
Although SEC did not raise any objections, investor morale appeared to have been shaken by these
events. Both the Google founders realized that the controversies associated with the IPO could affect its
success. Most of the investment bankers and large institutions had already expressed apprehension over
the IPO and Google knew that they could have a great effect on public sentiment. Even the share price
that Brin and Page had agreed to – $108 to $135 per share -- was declared to be unusually bullish39.
Most large companies had maintained a price one-seventh of Google‘s price.
To make amends for their mistakes and to make the IPO more appealing to the investors, Google
lowered the share price just one day before the actual IPO release and set the new price in the range
of $85 to $95. Analysts felt that the price was still too high. According to Professor Wayne Shaw of
SMU Cox School of Business, the high price of ―The auction has eliminated so many investors
from the process.‖40 Google would probably have performed better had it been priced at
$21.25 to $23.75 and to make up, it could have increased the total number of shares being auctioned,
he added.

35
Christine Williamson, Gregory Crawford, ―Giant Google IPO not clicking with many growth managers,‖
Pensions & Investments, Vol. 32 Issue 9, p1, 2p, 1c. May 3, 2004.
36
A company enters a "quiet period" when it files a registration statement for its offering with the SEC. The
period continues until the SEC declares the offering effective. During that period, the company's
communications with the public are "limited to ordinary-course business and financial information."
Failure to comply can cause an IPO to be delayed, and the SEC may impose further sanctions.
37
Matthew Fordahl, ―SEC opens inquiry into Google stock issue,‖ www.boston.com, August 17, 2004.
38
Matthew Fordahl, ―SEC opens inquiry into Google stock issue,‖ www.boston.com, August 17, 2004.
39
Chris Taylor, ―Google's IPO: Buyer, Beware,‖ Time Canada; Vol. 164 Issue 6, p12, 1/3p, 1c, August 9, 2004.
40
Paul R. La Monica,www.moey.cnn.com, August 19, 2004.

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In the wake of all the uncertainty and apprehension, the Google founders also felt threatened by the
market situation. Along with reducing the share price, they also reduced the number of shares that
they planned to offer. The total number of shares was brought down from the 25.7 million they had
initially planned, to 19.6 million. How investors would receive the IPO was a topic that was hotly
debated. (Refer to Exhibit IV for details of the IPO).

ALL’S WELL THAT ENDS WELL

On August 19, just a few hours of going public, Google‘s share climbed to more than $100, an
increase of almost 20% on the initial offer41. A day later, the shares fetched nearly $108.3142. The
IPO managed to raise nearly $1.4 billion for Google, a remarkable feat, considering the poor
performance of other technology shares. Of the 1.4 billion earned, Google earned nearly 1.1 billion
while its founders and the initial investors earned the rest.
Despite all the speculation, the Google IPO had performed extremely well. In fact, many experts felt
that had the Google founders not succumbed to market pressure and had not lowered the share price
drastically, the company would have earned an extra $23 per share or an additional $30 million43.
However, even after the IPO‘s successful performance, many investment bankers insisted that the
IPO had not been managed well. Many analysts, on the other hand, were of the view that taking all
the controversies associated with the Google IPO into consideration, it would appear that it had
performed remarkably well. According to tech entrepreneur, Randy Komisar, ―You could argue
that it only got done because of the auction‖.44 He suggested that the success of Google‘s IPO lay in
its not being launched in the conventional manner. In fact, had so many controversies existed in a
conventional IPO launch, the Wall Street underwriters would probably have advised the company
to call off or postpone the IPO, until investors became more favorable. Some analysts felt that
Google‘s success lay primarily in the fact that it was not dependant on investment bankers to sell it.
It sold on its own merit.
As Hambrecht, advisor to the Google IPO, said, ―I think it worked. Think about Google's
objectives. It wanted its 100 million user base to have access to its IPO, and it did that. It wanted to
get rational price discovery, and it did that too. They believed in a rational bidding process, and that's
what the auction gave them.‖45

41
Joseph Nocera, ―Two Cheers for the Google IPO,‖ Fortune (Europe), Vol. 150 Issue 4, P19, 5/6p, 1c,
September 6, 2004.
42
―Google Sets Possible Precedent for IPOs,‖ The Associated Press, New York, August 20, 2004.
43
―Google Sets Possible Precedent for IPOs,‖ The Associated Press, New York, August 20, 2004.
44
Joseph Nocera, ―Two Cheers for the Google IPO,‖ Fortune (Europe), Vol. 150 Issue 4, P19, 5/6p, 1c,
September 6, 2004.
45
Joseph Nocera, ―Two Cheers for the Google IPO,‖ Fortune (Europe), Vol. 150 Issue 4, P19, 5/6p, 1c,
September 6, 2004.

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 104-109-1

Exhibit I
The Dutch Auction IPO vs. the Traditional IPO
The ―Dutch Auction‖ method, also called the ―Descending Price Auction‖ is based on a pricingsystem
devised by Nobel Prize winning economist, William Vickrey. The name is derived from the fact
that the method was originally used for the auctioning of Dutch tulip bulbs. Under this method,
the auctioneer tries to find the optimal price for his stock or the lowest price at which an issuing
company can sell all available shares.
Under the traditional IPO release method, issuing companies use the services of underwriters to
assess and fix the price of the IPO. But in the Dutch Auction method, the auctioneer himself sets
an extraordinarily high price for the auction and lowers it as bidders begin to bid for it. For
example, imagine a Dutch Auction of a 1,000 shares. The auctioneer will start the auction by
quoting an abnormally high price. Thereafter, he will lower the price gradually and call again,
until someone bids for a few shares at a particular price. The auctioneer resumes the auction by
again lowering the price, until more bidders register to buy. The process is repeated until all 1,000
shares are spoken for.
At the end of the auction, bidders get the number of shares they wanted to buy but at the price bid
by the last bidder, which also happens to be the lowest price quoted for those shares. Even though
it appears as if the company had to sell the shares at the lowest price, the company is likely to
earn more in the Dutch Auction system than in the conventional auction method. Some features
of the Dutch Auction method are given below.
Sellers start by listing a high price for the shares.
Bidders specify both a bid price and the quantity they want to buy.
All winning bidders pay the same price per item — which is the lowest successful bid.
If there are more buyers than the number of shares available, the earliest successful bidders
are given preference while allocating the shares.
The higher bidders are more likely to get the quantities they have asked for. The lower bidders
may not get to purchase the quantities they asked for; so, it is better not to be among the lower
bidders.
In the conventional IPO, the investment bankers will assess the value of the shares. Once this price
has been estimated, the company will sell its stock for a price below the estimated price. Generally the
first few customers for the stock will be the banker‘s own clients, rich individuals and large institutions
who are known to the bankers. These customers are the lucky few who get to buy the stock at a
discounted price. They can immediately sell the stock on the market for a higher price and make a
profit for themselves. So, both the investment bankers and their clients are the beneficiaries of the
system, while the company whose stock was on sale, may not benefit greatly.
Most companies use this conventional system as it is supported by all investment bankers, who
are not really in favor of the Dutch Auction system, as it sidelines them. An advantage that the
firm gets in using the traditional method is that the price spike associated with a traditional IPO
imparts a successful image to the stock, which may boost the stock further. This benefits the firm's
executives and the company, since both own shares. Another advantage is that the majority of the
shares in a traditional IPO are held by large institutions and big investors, who are likely to hold
on to the shares for a long time unless the company performs really badly. Unlike the small
investor, they may not trade the shares at the least hint of a bad performance. So, it imparts more
stability to the company stock.
Adapted from: Bruce Gottlieb, “What Is a Dutch Auction IPO?” http://slate.msn.com, May 6, 1999,
http://pages.ebay.com.

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Exhibit II
Performance of Some Technology IPOs in 2004

Shares First Day Last

Public Offer
Name (Ticker) Offered/ Open/ Close Close Company
Date Price
Outstanding1 Price Price Deals In
Aug 27 eCOST.com, Inc. 3.5/17.5 (20%) $5.80 $6.40/$6.00 -- Online discount
superstore
Aug 19 Google Inc. 19.6/271.2 $85.00 $100.00/ $185.97 Internet
(7%) $100.33 company
Aug 5 RightNow 6.3/28.5 (22%) $7.00 $7.02/$7.00 -- CRM Solutions
Technologies,
Inc.
Jul 30 Volterra 4.5/23.2 (19%) $8.00 $8.10/$8.08 -- Semiconductors
Semiconductor for networking,
Corporation computing
Jul 22 LG.Philips LCD 24.0/-- (--) $15.00 $14.40/$14.05 -- Thin film
Co., Ltd. transistor LCD
panels
Jul 22 Kanbay 7.2/32.4 (22%) $13.00 $13.00/$15.20 -- IT solutions for
International, Inc. credit card,
insurance cos.
Jul 16 Freescale 121.6/121.6 $13.00 $13.00/$14.02 -- Microchips for
Semiconductor, (100%) computers,
Inc. networking
Jul 16 Greenfield 5.0/16.5 (30%) $13.00 $16.75/$18.70 -- Internet survey
Online, Inc. solutions
Jul 15 Phase Forward 5.2/31.5 (17%) $7.50 $8.75/$9.35 -- Software
Incorporated Solutions
Jun 25 Motive, Inc. 5.0/25.2 (20%) $10.00 $10.25/$10.15 -- Software
Solutions
Jun 16 Leadis 6.0/27.4 (22%) $14.00 $14.27/$13.10 $7.68 Semiconductors
Technology, Inc. for mobile
phones
Apr 22 SiRF Technology 11.0/43.8 $12.00 $14.45/$13.99 $11.48 Semiconductor
Holdings, Inc. (25%) designs and
software
1
Numbers are in millions.
Source: http://www.hoovers.com/business-information/--pageid 10008--/global-ipoc-index.xhtml
http://finance.yahoo.com/

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 104-109-1

Exhibit III
Income Statement (all figures in $, thousands)
2003 2004
Revenue Q1 Q2 Q3 Q4 Q1 Q2 Q3 YTD

Revenues 248,618 311,199 393,942 512,175 651,623 700,212 805,887 2,157,722

Y/Y Growth 488% 296% 201% 173% 162% 125% 105% 126%
Rate

Google 157,900 183,102 207,239 243,822 303,532 343,442 411,671 1,058,645

websites
Y/Y Growth 341% 209% 124% 104% 92% 88% 99% 93%
Rate

Google 81,218 117,583 174,444 255,354 333,752 346,226 384,285 1,064,264

Network
Websites
Y/Y Growth 17,329% 845% 462% 326% 311% 194% 120% 185%
Rate

Total 239,118 300,685 381,683 499,176 637,284 689,668 795,956 2,122,908

Advertising
Revenue
Y/Y Growth 560% 320% 209% 178% 167% 129% 109% 130%
Rate

Licensing & 9,500 10,514 12,259 12,998 14,339 10,544 9,931 34,814
other revenue
Y/Y Growth 57% 53% 73% 51% 51% 0% -19% 8%
Rate

COST Q1 Q2 Q3 Q4 Q1 Q2 Q3 YTD
Cost of 87,195 117,401 170,390 250,868 315,398 326,377 362,099 1,003,874
Revenue
As % of 35% 38% 43% 49% 48% 47% 45% 47%
Revenue

Traffic 70,131 96,559 143,487 216,356 271,002 277,034 302,932 850,968

Acquisition
Cost
As % of 28% 31% 36% 42% 42% 40% 38% 39%
Revenue

Other Cost of 17,064 20,842 26,903 34,512 44,396 49,343 59,167 152,906
Revenues
As % of 7% 7% 7% 7% 7% 7% 7% 7%
Revenue

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 104-109-1

2003 2004
Revenue Q1 Q2 Q3 Q4 Q1 Q2 Q3 YTD

Research & 12,505 17,492 32,774 28,457 35,019 45,762 57,409 138,190
Development
As % of 5% 6% 8% 6% 5% 7% 7% 6%
Revenue

Sales & 17,767 24,822 36,575 41,164 47,904 56,777 65,512 170,193
Marketing
As % of 7% 8% 9% 8% 7% 8% 8% 8%
Revenue

General & 10,027 12,535 13,853 20,284 21,506 25,577 40,774 87,857
Administrative
As % of 4% 4% 4% 4% 3% 4% 5% 4%
Revenue

Settlement of NA NA NA NA NA NA 201,000 201,000

disputes with
Yahoo
As % of NA NA NA NA NA NA 25% 9%
Revenue

Stock based 36,418 34,165 73,794 84,984 76,473 74,761 67,981 219,215
compensation
As % of 15% 11% 19% 17% 12% 11% 8% 10%
Revenue

Total Costs & 163,912 206,415 327,386 425,757 496,300 529,254 794,775 1,820,329
Expenses
As % of 505% 335% 343% 307% 203% 156% 143% 161%
Revenue

Profitability Q1 Q2 Q3 Q4 Q1 Q2 Q3 YTD
Income from 84,706 104,784 66,556 86,418 155,323 170,958 11,112 337,393
Operations
As % of 34% 34% 17% 17% 24% 24% 1% 16%
Revenue

Net Income 25,800 32,168 20,426 27,254 63,973 79,063 51,983 195,019
As % of 10% 10% 5% 5% 10% 11% 6% 9%
Revenue
Source: http://investor.google.com/fin_data.html

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 104-109-1

Exhibit IV

Initial Public Offering Details

IPO Date: August 19, 2004

Price: $85.00

Method: Modified Dutch Auction

Lead Underwriters: Morgan Stanley, Credit Suisse First Boston

Stock Symbol: GOOG

Exchange: NASDAQ

No. of Shares Offered: 19,605,052

Value of Offering: $1.67 billion

Initial Market Cap: $23.1 billion

271.2 million
Total Initial Shares Outstanding:
(33.6 mil. class A, 237.6 mil. class B)

Allocation Percentage: 74.2% of bidded shares

Form S-1 Prelim. Prospectus (amend. 8/18)

Initial SEC Filings:
Form 10-Q Quarterly Report (amend. 8/18)
Source: www.google-ipo.com

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 104-109-1

Additional Readings & References:

1. Bruce Gottlieb, What Is a Dutch Auction IPO? http://slate.msn.com, May 6, 1999.

2. Linda Himelstein, Ben Elgin, The Gold in Google's IPO Goes to..., BusinessWeek, Issue
3858, p50, 2/3p November 17, 2003.
3. Michael S. Malone, The complete guide to Googlemania, Wired Magazine, Issue 12.03,
March 2004.
4. Aaron Swartz, April 29, 2004: Google IPO, Google Foundation, http://google.blogspace.
com, April 29, 2004.
5. Danny Sullivan, Google IPO to happen, files for public offering, www.searchenginewatch.
com, April 29, 2004.
6. Stefanie Olsen, Dawn Kawamoto, Google files for unusual $2.7 billion IPO,
www.cnetnews.com, April 29, 2004.
7. Democracy and Control in Google's IPO, BusinessWeek Online, April 30, 2004.
8. Paul R. La Monica, Google sets $2.7 billion IPO, www.money.cnn.com, April 30, 2004.
9. Christine Williamson, Gregory Crawford, Giant Google IPO not clicking with many
growth managers, Pensions & Investments, Vol. 32 Issue 9, p1, 2p, 1c. May 3, 2004.
10. Gregory Crawford, Dutch auction may gain popularity if Google's IPO effort is a
success, Pensions & Investments; Vol. 32 Issue 11, p3, 2p, 1c, May 31, 2004.
11. Ken Clark, Gaga for Google? Chain Store Age, Vol. 80 Issue 6, p98, 1p, 1c June 2004.
12. Ben Elgin, Google's IPO: Asking Too Much? BusinessWeek Online, July 27, 2004.
13. Robert Barker, The Key Word In Google's IPO: Risky, BusinessWeek, Issue 3895,
p75, 1p, 2c, August 9, 2004.
14. Chris Taylor, Google's IPO: Buyer, Beware, Time Canada; Vol. 164 Issue 6, p12, 1/3p, 1c,
August 9, 2004.
15. Scott Kessler, The A-B-Cs of Google's Auction, BusinessWeek Online, August 10, 2004.
16. Ben Elgin, The Google IPO Marches On, BusinessWeek Online, pN.PAG, 00p,
August 13, 2004.
17. Fear of floating, The Economist, Vol. 372, Issue 8388, August 14, 2004.
18. Google This, www.telephonyonline.com. August 16, 2004.
19. Matthew Fordahl, SEC opens inquiry into Google stock issue, August 17, 2004,
http://www.boston.com.
20. Google Closes Unusual Auction to Set IPO, The Associated Press, San Jose,
www.abcnews.com, August 18, 2004.
21. Olga Kharif, Not all Dutch Auctions are equal, BusinessWeek Online, August 18, 2004.
22. Paul R. La Monica, Google goes low, www.money.cnn.com, August 19, 2004.Google Sets
Possible Precedent for IPOs, The Associated Press, New York, August 20, 2004.
24. Dan Gillmor, Naysayers are wrong: Google IPO was a success, www.siliconvalley.com,
Aug. 20, 2004.
25. Jason Kottke, Surowiecki on the Google IPO, www.kottke.org weblog, August 20, 2004.
26. VCs don’t sell in Google IPO, Private Equity Week, August 23, 2004.

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27. Google IPO is Smaller than Anticipated, Corporate Growth Report 206-676-3802,
28. August 23, 2004.
29. Gerard Berube, Daring to be different, CA Magazine, August 2004.
30. Joseph Nocera, Two Cheers for the Google IPO, Fortune (Europe), Vol. 150 Issue 4, P19,
5/6p, 1c, September 6, 2004.
31. Matthew Clark, Google founder ponders Irish R&D unit, ElectricNews.net, October 7, 2004.
32. What is a Dutch Auction? http://pages.ebay.com.

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