[FoRK] NYTimes.com Article: Google Says to Investors: Don'
t Think of Flipping
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khare at alumni.caltech.edu
Fri Apr 30 11:42:29 PDT 2004
The article below from NYTimes.com
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Google Says to Investors: Don't Think of Flipping
April 30, 2004
By ALEX BERENSON
Wall Street loves Google, but the feeling isn't mutual.
That is the message permeating nearly every page of the
public offering statement that Google Inc., the Web search
engine company, filed yesterday. In a frank and provocative
statement, the company's leaders argued that companies
cannot manage for the long term unless investors and
analysts have limited say in the way they are run.
In this, they are responding to a widespread belief that
investor pressure for predictable short-term earnings
growth led many publicly traded companies to engage in
accounting gimmickry and business improprieties in the
1990's. Google says that it will not offer quarterly
earnings guidance and that it expects shareholders to
understand even if it makes unprofitable short-term
"A management team distracted by a series of short-term
targets is as pointless as a dieter stepping on a scale
every half-hour," Larry Page, one of Google's co-founders,
wrote in a "Letter From the Founders." The letter, which
appeared at the front of the statement, was signed by Mr.
Page and his fellow founder, Sergey Brin.
Many institutional investors may cheer that attitude. But
another part of the company's strategy will draw some
criticism. Google aims to insulate its executives somewhat
from shareholder demands. The company will have dual
classes of stock that will give company insiders much more
voting power than public investors to elect directors. The
company's disdain for the traditional stock offering
process is also evident. Instead of selling a small number
of shares at a predetermined price, which often stokes
demand for the stock when it begins trading, Google will
auction its shares to the highest bidders. In that way, the
windfall profits from the offering will go to the company
and its private shareholders, not to favored customers
chosen by Wall Street investment banks. In its registration
statement, Google explicitly warns investors not to buy the
offering in the hope of making a short-term profit by
flipping their shares.
Google can behave with so little regard for shareholders'
wishes because its business is so attractive that investors
will be clamoring to buy stock no matter what conditions
the company sets. The company's sales and profits are
increasing at a spectacular rate, at least for now, and its
profit margins appear to be among the highest in corporate
In 2003, Google reported an operating profit of $340
million on sales of $960 million. But the 2003 figure
appears to understate the company's cash profit margin,
since it includes very high expenses related to stock
options that will probably decline in future years. On a
cash basis, Google had an operating profit of $570 million
in 2003, and an operating margin of 62 percent.
Given those figures, Google will easily command a market
valuation of at least $30 billion, and perhaps much more.
EBay, which had an operating profit of $660 million on
sales of $2.2 billion last year, is valued at $54 billion;
Yahoo, with sales of $1.6 billion and operating cash flow
$428 million, is valued at $36 billion.
So the offering will make billionaires of Google's top
three executives. Mr. Page, 31, and Mr. Brin, 30, each owns
about 15 percent of the company, conservatively worth more
than $4.5 billion; Eric Schmidt, the 49-year-old chief
executive, has stock options on 6 percent, worth $1.8
Those figures are eye-popping, even in Silicon Valley,
which during the 1990's generated fortunes on a seemingly
weekly basis. But if the registration statement is a guide,
the prospect of riches has not dulled the reservations that
Mr. Page and Mr. Brin have about the public markets.
"As a private company, we have concentrated on the long
term, and this has served us well," Mr. Page wrote in the
public offering statement, which companies must file with
the Securities and Exchange Commission before selling
shares. "As a public company, we will do the same. In our
opinion, outside pressure too often tempts companies to
sacrifice long-term opportunities to meet quarterly market
expectations. Sometimes this pressure has caused companies
to manipulate financial results in order to 'make their
Mr. Page pledged that Google would never manipulate its
results or allow accounting decisions to dictate its
business decisions. Nor will the company provide quarterly
earnings guidance, as most public companies have done for
the last two decades.
Neil Barsky, a former analyst for Morgan Stanley who runs a
hedge fund in New York, said Google's attitude was
refreshing and candid.
"There is a slavishness that companies feel that they have
to play to Wall Street quarter in and quarter out, and that
is not the way the real world works," Mr. Barsky said.
"They're saying, 'Merely because we go public and because
analysts will feel the need to comment on every quarter
does not mean that we will manage our business for
short-term pressures.' I agree to that 100 percent. That's
the right way to run a business."
But Google evidently does not trust shareholders to think
long term. Under the dual-class voting structure, the new
shares it sells to the public will have only a tenth as
much voting power as the shares current investors own.
"New investors will fully share in Google's long-term
growth but will have less influence over its strategic
decisions than they would at most public companies," Mr.
Page wrote. He compared Google to Berkshire Hathaway,
Warren E. Buffett's company, which also has a two-class
Not all investors think this is a good idea. Thomas
Giovine, a hedge fund manager in Los Angeles, said
shareholders should punish Google for its failure to give
new investors the same rights as its founders. Once a
company goes public, its founders must understand and
accept that they are responsible to public shareholders and
are no longer fully in control, he said.
"The guys sitting in the boardroom are just employees that
the owners are paying to run companies as best they can,"
Mr. Giovine said.
Still, Google's motives seem decent, he said. "At the end
of the day, it's probably a good thing to get Wall Street
to think longer term."
The company's offering process will also give Wall Street
less control over its shares and new shareholders much less
of a chance to make a short-term profit. During the late
1990's, many technology companies offered a small number of
shares to big investors at a price far below the price that
individual investors were willing to pay. When the shares
began to trade publicly, those big investors often would
flip their shares to smaller investors for huge profits.
For example, VA Linux, a computer company, rose from $30 to
$239.25 when it opened for trading in December 1999. VA
Linux's stock closed yesterday at $2.15 a share.
But Google plans to set its offering price differently. The
company will ask investors how many shares they want to
purchase, and at what price, and then try to sell enough
shares to the highest bidders so that its stock is unlikely
to rise quickly on its first day.
"We are working to create a sufficient supply of shares to
meet investor demand at I.P.O. time and after," Mr. Page
wrote. "We would like you to invest for the long term, and
to do so only at or below what you consider to be a fair
As a result, investors who buy Google stock in the hope of
making a quick profit may be disappointed, Mr. Page wrote.
"Short-term speculation without paying attention to price
is likely to lose you money, especially with our auction
Of course, the structure also guarantees that Mr. Page and
Mr. Brin, who plan to sell part of their holdings in the
offering, will get the highest price possible.
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