Problem 8-12 Mini-Case Valuing Google IPO Share Price16 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 16 2010 Betty Simkins, Williams Companies Professor of Business and Professor of Finance, Oklahoma State University. All Rights Reserved. Reprinted with permission. 304 chapter 8Relative Valuation Using Market Comparables Problems 305 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 increased pressure from well-funded rival entities. Yahoo! Inc., with a market cap of approximately $38.43 billion, is generally regarded as following a business model very similar to Googles. a. Use the data found in Exhibit P8-12.1 for the following companies as comparables in your analysis: Earthlink, Yahoo!, eBay, and Microsoft. Compute the IPO value of Google: 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 Googles 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.17 b. Which of the four comparable firms do you think is the best comparison firm for Google? Why? c. How has the stock performed after the IPO? Do you believe that Google is currently correctly valued in the stock market? Explain your answer.