
How I Did It: Google's CEO on the Enduring Lessons of a Quirky IPO - faramarz
http://hbr.org/2010/05/how-i-did-it-googles-ceo-on-the-enduring-lessons-of-a-quirky-ipo/ar/1
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flipbrad
I disagree with another HN commenter on the value of this article. Taking two
backward steps through Eric Schmidt's conclusion: \- "I wouldn’t change a
thing - except maybe (an interview that Playboy published putting Google in
breach of the SEC-mandatory quiet period)" \- "To this day I can’t fully
explain why our stock price opened so high—causing the pop we had tried to
avoid [Google sold its shares at $85; three days later people were selling
what they'd bought at $110]. A lot of complicated factors played a role" (none
of which are discussed).

Basically, they screwed up, left a huge amount of money on the table, and he
doesn't admit to the possibility of any possible improvements, the possibility
that doing the IPO at that time was the wrong call, or discuss the factors
behind the pop despite their strategy to try and avoid it.

Firstly, Could Google not have just stayed privately owned, but published its
financial records for a few years, before then doing their IPO? From this
article it doesn't sound like the IPO cash was particularly important at that
point, and the meteoric rise in the share price suggests (with 20:20
hindsight) that they let far too much go, far too early on. The crucial
paragraph doesn't discuss the decision process to do the IPO, it only lists
the options. That's disappointing.

As for why they went for a Dutch auction - to bust the institutional racket
(good on them) and because "It was consistent with the auction-based business
model we used to sell our ads, so we felt we understood the underlying
dynamics, and it had a strong intuitive appeal for us." Clearly that
understanding wasn't worth shit - it doesn't seem to have helped them predict
anything about what happened in the auction. The anti-establishment attitude
was really commendable, but it seems like it was a huge strategic mistake.
Some factors may of course have been out of their hands - public
inexperience/wariness with the Dutch auction format leading to low initial
bidding, pseudo-concerted action to keep the bids low, etc. But that's a
strategic mistake which a strategy exec should be owning up to. The two first
weeks in August before the bidding opened were stuffed with terrible Google
news (and he sets up a surprise Playboy publication of an April interview as a
paper tiger - but see the diagram in the article for the rest). They got
pushed into August because of the complexity, and it is a bad month to do an
IPO, but he says they didn't care.

He bemoans the press for portraying their approach as 'hubristic' and
therefore worth staying away from. Yet the press was spot on with their
analysis of the factual situation - it _was_ hubristic, seemingly not
particularly well thought through, or even diligently executed. What the press
got wrong is in concluding that it was something to stay away from. Quite the
opposite - the people who got in at the Dutch auction stage made a vast amount
of money! Google didn't, though.

So I found the pomp and pride underpinning the article really quite
unsubstantiated - and yes, particularly hubristic. It was innovative, done
with some honest and interesting motivations, but it was a cockup, from top to
bottom. I disagree that they had 'risen to the task'. They do that in their
core business, undoubtedly, day in, day out, but this was a fuzzy mess and I'm
always worried by CEOs who don't learn from cockups - substantially more so
when they deny that the cockup even existed

~~~
adamt
I disagree with your assertion that they left a huge amount of money on the
table.

From wikipedia
([http://en.wikipedia.org/wiki/History_of_Google#Financing_and...](http://en.wikipedia.org/wiki/History_of_Google#Financing_and_initial_public_offering))

Google's initial public offering took place on August 19, 2004. A total of
19,605,052 shares were offered at a price of $85 per share.[27] Of that,
14,142,135 (another mathematical reference as √2 ≈ 1.4142135) were floated by
Google and 5,462,917 by selling stockholders. The sale raised US$1.67 billion,
and gave Google a market capitalization of more than $23 billion.[28]

So - assuming the market established a price of $110, and the sold at $85.
Google lost out 14,142,135 x $20. Now $280M is not to be sniffed at, but for a
company with a market cap of $23,000M it's little over 1% of it's value. Given
the shares had risen 25% on the opening day, 1% is not really material.

Given that the company was cash flow positive, the difference between raising
$1.67B and and $1.93B of would probably not have any operation affect on the
business.

~~~
flipbrad
I'm not saying a dutch auction is necessarily a worse option. Indeed it might
theoretically be the best. But they spent a vast amount of money setting it
up, with all the extra legal fees and transactional costs, so let's not focus
entirely on the money left on the table by the strategic error to a) pick a
theoretical, rather than tested, procedure that was b) seemingly, poorly
executed and c) if it yielded any lessons at all, for which there is no
evidence, Schmidt refuses to share.

On a pedantic point, if my understanding is correct, google made (14m * 85)
about 1.2 bil on the IPO, not 1.67 - the rest being sold by other stockholders
(who, incidentally, 'lost' $136.5 mil due to the pop, and made $464m, minus
fees for being involved in the IPO - not insignificant) That means that Google
made 1.2 bil, but had they 'got it right' (very difficult, of course, as other
commenters point out, 14% pop is usual on IPOs) they would have made $1.55
bil. You can make it seem small compared to their market cap, but the headline
is: he's proud at a messy, protracted transaction, possibly the most important
in Google's history, that netted them $353m more than their 1.2 bil haul.
That's 20-25% on the table, well in excess of the 14% bandied about in this
thread.

And all that says nothing about the overarching questions of 'Why IPO, why
then?' and 'what actually went wrong?'

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zaatar
One page version of the article: [http://hbr.org/2010/05/how-i-did-it-googles-
ceo-on-the-endur...](http://hbr.org/2010/05/how-i-did-it-googles-ceo-on-the-
enduring-lessons-of-a-quirky-ipo/ar/pr)

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mwerty
I wonder if he wrote it himself. It's really well written.

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derrickchen
The reason for the underpricing is simple: it was the first big Dutch Auction
IPO and when something is new, only the few will participate leaving the
hesitant to jump in once it trades on the open market, bidding up the price.

This left the auction open to certain big institutions (Fidelity and another I
forget) to badmouth the deal to lower the price while buying big themselves.
Of course they were joined by the Investment Banks who really like that 7%
standard IPO fee and felt threatened. And the press to whom everything is
either an epic success or huge failure.

As a first, the deal also had many technical issues which lead to the August
pricing and fed the negativity.

Anyway, the key win was that anyone (even a tiny investor like me) could buy
in the IPO. Just try to get shares in any decent IPO run the normal way. If
you do, it's likely to be a broken deal they couldn't find demand for and
you'll most likely lose money at first trade.

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jamaicahest
Seems like a chapter out of [http://www.amazon.com/Google-Story-Googles-10th-
Birthday/dp/...](http://www.amazon.com/Google-Story-Googles-10th-
Birthday/dp/038534273X/)

