Session 15: November 12, 2007

Initial Public Offering (IPO)

Quote of the Day

"Failure is never final and success is never ending. Success is a journey, not a destination." ~ Robert Shuller

Summary

What is an IPO? In this case study and lecture session we will look at a particular stage in the growth of an explosive venture: the decision to go public. While an initial public offering (IPO) has been widely heralded by the media as the seminal event in the start-up process, there is more to the story than champagne celebrations and new-found riches. An IPO has dramatic effects on the company and the founders; in this case we will look more closely at the whole story of an IPO and the IPO process in general.

Required Readings (Policy on Required Readings.)

There is a lot of reading here, so you will need to choose what to skim and what to actually read in depth. We suggest starting with the Byers text excerpt, and then reading Chapters 1 and 2 from the "Guide to the Initial Public Offering" with more care than skimming, but still at a relatively rapid pace. You can then quickly skim Chapter 3 of that guide. To complete your overview, you can watch the video clips. This background now prepares you to read the cases -- Netflix and Google (both available online in the course reader) that we will compare and contrast. Given that you have no written preparations to make for this class, we will expect you to have read the cases carefully and to be prepared for a full discussion. Study questions to guide your preparation appear down below. We suggest focusing primarily on the main part of the case, and then turning to the exhibits to fill the holes in your understanding.

• Readings from the Textbooks:
• Technology Ventures (Dorf and Byers): Review 18.11 Initial Public Offerings
• Cases (please read both):
• Netflix - Going Public (in course reader)
• Preparing for the Google IPO: A Revolution in the Making? (in course reader)
• Articles to read:
  • Guide to the Initial Public Offering (published by Wilson Sonsini Goodrich and Rosati)
• Watch the following short video clips:
• Karen Richardson (E.piphany) - To Stay Private or Go Public
• Karen Richardson (E.piphany) - Public vs. Private Pros and Cons
• Frank Levinson (Finisar) - How does going public change you and your company?

Study Questions (No Team Analysis for this session.)

1. What are the internal and external factors that impact a company’s decision to pursue a public offering? What are the costs and benefits of going public?

2. What is the role of banks in IPOs? How do they make money?

3. What do you think are the most important criteria for selecting a lead underwriter? What leverage does the company have towards ensuring that the underwriter, once selected, follows through on the company’s expectations? Who should write the prospectus? Who is the audience?

4. To what extent are the company’s and the underwriter’s incentives aligned when it comes to pricing the offering? What influence does a manager have over the pricing decision?
   
   
5. Is IPO underpricing a cost to the company concerned? Should the IPO process be transformed? What is a dutch auction? Did Google do it right? Are investment banks threatened by the Google process?
   
   
6. Considered at the time of the IPO, what was Google's business? What were the strategic threats to Google? Would you have expected the Google IPO to be successful from a long-run perspective? Has history given us a verdict yet (considered as of today)?
   
   
7. What legal and ethical concerns might Netflix and Merrill Lynch have related to the issuance of directed shares? How would you decide the number of directed shares relative to the remainder of the offering? How would you decide who would receive them
   
   
8. You are Reed Hastings: what do you do once you get off the phone with David Hyman after the ‘popcorn incident’ discussion? Evaluate and rank your options; consider your actions in light of the upcoming pricing discussion.