RatcliffeBlog - Mitch Thinking Out Loud

Google's Web-based IPO

I've been thinking about the Google IPO, rather than joining the chorus of celebration, both of the fact it is going public and that it will do so over the web using an auction format (sorry, it's an Financial Times page).

Here is what is significant: The Net auction will distribute the shares as widely as can be achieved in this world, rather than allowing large pools of shares to be held by major institutional investors. As an anonymous source told the FT: ""They could get a $100bn" stock market value, said one person involved. "However, all the shares would end up with Aunt Agatha in Des Moines and Uncle Milt in Pittsburgh and there would be no real public market at all."

This reduces the liquidity of the stock, which will keep the share prices higher in the short- to medium-term, because there will be a shortage of Google shares for people who want to buy large quantities. In the long term, it is a promise to shareholders that they will receive value directly from the company, which is already profitable -- that is, old fashioned dividends. This is a significant change in the value proposition in stock offerings. It suggests that the Bush suspension of the dividend tax could actually make IPOs by unprofitable companies less attractive, reducing the ability of younger companies to raise money.

It also raises significant issues relating to the sale of stock by insiders, who will obviously hold the vast majority of shares when the IPO is over. By tracking the sales of stock by insiders we should be able to get a very clear idea of how they are feeling about the company's performance -- and there may need to be a more explicit disclosure of reasons for sales of stock in advance. At least this is what my sojourn in investment banking tells me as I contemplate the Google IPO story.

UPDATE: Tristan Louis adds some interesting thoughts about what Google might do with the money it raises.

Tristan's point about "what would they buy?" is an interesting one. I think Google could come out of this with a $30 billion to $40 billion valuation and about $8.5 billion in cash. Of course, it is profitable, so it will keep tossing off cash to pay for more acquisitions or to pay off an acquisition of the size of Yahoo. But I think that Tristans latter thought is more likely where they will go -- the assemblage of a variety of network services that can be exposed by extending their APIs into new functionality anchored and tied together by comprehensive search functionality.

Posted by Mitch Ratcliffe at October 24, 2003 09:06 AM | TrackBack