Google inc. of Mountain view, California, operates the most popular and powerful search engine on the Web. The company went public using an unconventional Dutch auction method on August 19,2004. The resulting IPO was the largest internet IPO ever, raising $1.67 billion and leaving the firm with 271,219,643 shares of common stock.

While Google commands a wide lead over its competitors in the search engine market, it is witnessing an increased pressure from well funded rival entities. Yahoo! inc., with a market cap of approximately $38.43billion, is generally regarded as following a business model very similar to Google's.

Questions A, B, and C should be filled out in the attached excel file.

a. Using the method of multiples based on both the P/E ratio and the enterprise value to EBITDA ratio, at what price should the stock be offered? Use the data found in Exhibit p8-10.1 for the following companies as comparable in your analysis; Earthlink, Yahoo,eBay,and Microsoft. Compute the IPO value for google's shares using each of the comparable firms separately, and then use an average "multiple" of the comparable firms. Use the year-end 2003 balance sheets and income statements of the comparable firms to do the analysis. Assume that Google's forecasted values at the time of the IPO are as follows: Net income is $400 million,EBITDA is approximately $800 million, cash and equivalents are $430 million and interest-bearing debt(Total short-term and long-term ) equals only $10 million.

b. which of the four comparable firms do you think is the best comparison firm for Google? Why?

c. How has the stock performed because the IPO? Do you believe that Google is currently correctly valued in the stock market? Why or Why not?

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8-10.xlsx

PROBLEM 8-10 Given Solution Legend EXHIBIT 1 Earthlink ELNK $159,399,000 $10.00 $1,593,990,000 $900,000 $$349,740,000 $89,088,000 $218,100,000 $(62,200,000) (0.39) Financial Information 2003 Shares Outstanding 2003 Fiscal Close Stock Price Market Capitalization Short Term Debt Long Term Debt Cash & Equivalents Short Term Investments EBITDA Net Income Calculated EPS Yahoo YHOO $655,602,000 $45.03 $29,521,758,060 $$750,000,000 $713,539,000 $595,975,000 $455,300,000 $237,900,000 0.36 eBay EBAY $646,819,000 $64.61 $41,790,975,590 $2,800,000 $124,500,000 $1,381,513,000 $340,576,000 $818,200,000 $441,800,000 0.68 = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output Microsoft MSFT $10,800,000,000 $25.64 $276,912,000,000 $$$6,438,000,000 $42,610,000,000 $14,656,000,000 $9,993,000,000 0.93 Solution Average Price to Earnings Enterprise Value EBITDA multiple Part a. Google EBITDA Cash Debt Net income Shares EPS IPO proceeds $800,000,000 $430,000,000 $10,000,000 $400,000,000 271,219,643 $1.47 $1,670,000,000 Earthlink Imputed IPO price per share from PE ratio Impute EV from EBITDA multiples Owner's equity Impute IPO price per share Part b. Part c. Yahoo eBay Microsoft Average

PROBLEM 8-10 Given Solution Legend = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output EXHIBIT 1 Financial Information 2003 Shares Outstanding 2003 Fiscal Close Stock Price Market Capitalization Short Term Debt Long Term Debt Cash & Equivalents Short Term Investments EBITDA Net Income Calculated EPS $ $ $ $ $ $ $ $ $ Earthlink ELNK 159,399,000 10.00 1,593,990,000 900,000 349,740,000 89,088,000 218,100,000 (62,200,000) (0.39) $ $ $ $ $ $ $ $ $ Yahoo YHOO 655,602,000 45.03 29,521,758,060 750,000,000 713,539,000 595,975,000 455,300,000 237,900,000 0.36 $ $ $ $ $ $ $ $ $ eBay EBAY 646,819,000 64.61 41,790,975,590 2,800,000 124,500,000 1,381,513,000 340,576,000 818,200,000 441,800,000 0.68 $ $ $ $ $ $ $ $ $ Microsoft MSFT 10,800,000,000 25.64 276,912,000,000 6,438,000,000 42,610,000,000 14,656,000,000 9,993,000,000 0.93 Solution Average Price to Earnings Enterprise Value EBITDA multiple Part a. Google EBITDA Cash Debt Net income Shares EPS IPO proceeds $ $ $ $ $ $ 800,000,000 430,000,000 10,000,000 400,000,000 271,219,643 1.47 1,670,000,000 Earthlink Imputed IPO price per share from PE ratio Impute EV from EBITDA multiples Owner's equity Impute IPO price per share Part b. Part c. Yahoo eBay Microsoft Average