Google’s CEO on the Enduring Lessons of a Quirky IPO
May 10, 2010, as published on Harvard Business School Journal
It happened six years ago, but I still remember every detail of our journey to becoming a public company. It was a uniquely “Googley” experience that to this day says a lot about who we are.
An initial public offering can change a company. Many in the media seemed certain that if we went public, the Google ethos wouldn’t survive. People predicted that we would suddenly be divided into haves and have-nots on the basis of how many shares of Google stock each of us held. The talent would cash out and quit. A new focus on pleasing Wall Street would cause us to lose our prized objectivity and independence. Developing the infrastructure to become a public company would dull our edge. Ultimately, people feared that as Google transitioned from a bright young start-up to a mature public company, it would lose the quirky spirit that made it so innovative.
None of that happened. And I firmly believe that at our core we are the same company we were then – just a lot bigger. Although it is dangerous to read too much into a single event, I think one of the reasons we have held on to our values is that we chose an unconventional path to going public.
THE DUTCH AUCTION
We reviewed as much data about prior IPOs as we could get our hands on and agreed on a few things we did not like about the typical process. We didn’t like the “pop” often experienced by successful technology companies when they went public. The difference between the IPO price and the price of a company’s stock at the end of the first day or week of trading seemed to us to be money that should properly be in the hands of the company. But ordinarily, large institutions with connections to the underwriting syndicate are the only group allowed to buy those shares at the IPO price, and they flip them a few days later for a healthy profit. We wanted something much more transparent and open – and we wanted our users to have a chance to take part.
As we were reviewing our alternatives, we were drawn to an approach championed by WR Hambrecht, an investment bank based in San Francisco, which argued that auctions were a better way to raise capital than the traditional underwritten IPO. In what is known as a Dutch auction, a company would collect bids from all interested investors and then group them by how much each investor was willing to pay. The company (and its bankers) would then move down from the top bid until it reached the highest price at which it could sell all the shares it wanted to offer. The company could choose that price (or, for a variety of reasons, a lower one) and then sell all the shares that were bid on at the chosen price or higher as soon as the stock was traded on its exchange.
We liked the idea of opening up our auction to everyone – retail investors as well as traditional institutional buyers. We hoped that an auction would do a better job than the traditional approach of setting a price for our shares – and would allow our share price to remain stable after we went public.
No company the size of Google had ever done such a thing. Our auction would be on a significantly larger scale than other auction-based IPOs. We would have to build systems to support that increased scale. And those systems would need to be reviewed by the Securities and Exchange Commission.
The SEC’s “quiet period” requirements prevented us from talking about our business in the run-up to a possible initial public offering. Because Google was in the media spotlight during this period, people came out in droves to criticize our business, our management, our culture, our IPO – almost every aspect of who we were. And because we had to remain silent, we weren’t able to defend ourselves, correct misinformation or try to reassure the public.
We were legally required to present our financials by 2 p.m. on April 29, 2004. But we pulled a fast one: We announced to the world at 11 a.m. that we were going public. It caught everyone by surprise.
The IPO process and our business then entered a sort of limbo as we waited for, and then responded to, the SEC’s comments on our registration statement. Our legal and management teams worked from May through early August to address the SEC’s concerns.
We were now on track to go public in August – until the September issue of Playboy hit the newsstands. It turned out that Larry Page and Sergey Brin, Google’s founders, had given a long interview to the magazine back in April, and it was published in this issue. The interview, which of course touched on business issues, may have violated the “quiet period” rules, and the SEC considered forcing us to postpone the entire process.
Working with the regulators at the commission, we came up with a solution: We included the Playboy interview in our official SEC filing as an appendix – meaning it would be available to any potential investor.
In mid-August the bidding began, based on our published expected IPO price range of $106 to $135 a share. But there weren’t a lot of orders, and the offers that did come in were at or below the low end of the range we’d anticipated. When the bidding period ended, it was clear that we weren’t going to be able to sell all the shares we had planned to sell in the price range we wanted. Our underwriters believed that we could close the IPO with a price around $80 to $90 a share if we reduced the number of shares for sale, and on Aug. 18 we agreed to price it at $85 a share. We flew overnight to New York to watch our shares start trading on the Nasdaq the following day.
We watched the first trade, but it wasn’t at $85 – it was at $100. Someone was making fast money. Despite our efforts, people were buying and flipping within an hour, taking a quick $15-a-share gain. The volume was huge. All day long the stock price never went down. It closed at $100.30. By the following week, our stock was trading at $105 to $110.
For a CEO, outcomes are what matter most. Although personally I would prefer to run a private company (it’s easier), we made the decision to go public, and Google ended up succeeding beyond our most optimistic dreams.
(Eric Schmidt is the chairman and CEO of Google.)