[IP] Going Public May Be Google's First Bad Move
Going Public May Be Google's First Bad Move
By Allan Sloan
Tuesday, May 4, 2004; Page E03
Boy, the guys running Google are really making a mistake by taking the
company public. Yeah, I understand that employees and venture capitalists
are agitating for a stock they can sell. But Google would have done well to
remain a private company and let its stock get bought and sold in a private
market at an appraised value rather than being subject to Wall Street's whims.
No matter how high-minded and determined founders Larry Page and Sergey
Brin and chief executive Eric Schmidt are about thinking only long-term,
taking Google public will set the snake of greed loose in their corporate
Eden. They'll inevitably find themselves having to pay at least some
attention to Wall Street.
This is really a shame, because Google doesn't really have to go public.
Normally, a company sells stock to the public because it really needs the
money. (Hence the old expression, "Go public or go broke.") Not so at
Google, which is flush.
When you adjust for the charge that Google takes for employee stock options
-- commendably, it's treating them as an expense -- you see that the firm
has profit margins of 60 percent before taxes. As a result of being so
profitable and not having to shell out much for capital spending, Google is
awash in cash. It had $455 million on March 31, up from $335 million at the
end of last year and $146 million at the end of 2002. Very impressive.
Yes, it's true that Google would have had to start disclosing its finances
even if it hadn't chosen to sell stock to the investing public. That's
because securities laws require a company that has more than 500
shareholders, which Google now does, to file public financial reports. But
reporting numbers publicly isn't the same thing as having stock trading
publicly. Having public stock will affect employees -- and hence will
affect the company. Once the stock starts trading, Google employees, in the
proud Silicon Valley tradition, will find themselves using the latest price
to calculate their up-to-the-minute net worth. That won't inspire long-term
thinking. Let the stock drop and stay down awhile, and Googlers will turn
from mellowing into bellowing. It's the human condition.
Yet, you have to admire the way Google's ruling threesome is kicking the
Wall Street trolls around. As you can see in their filing, which includes a
paean to Berkshire Hathaway Chairman (and Washington Post Company board
member) Warren Buffett, they're determined to keep the stock price from
soaring into the stratosphere immediately after the offering and ensnaring
the unwary. Rather than the typical hot offering, in which the company and
Wall Street conspire to make available, at an artificially low price, far
fewer shares than the market wants, they plan to let the market set the
price in a Dutch auction. Investors will bid for shares rather than Wall
Street selling a fixed number of shares at a fixed price.
That way, instead of Wall Street giving what amounts to free money to
favored insiders by doling out stock that can be sold at an immediate
profit, the company (and any other selling shareholders) will reap the
financial benefit.
The only other major deal I've seen like that is Buffett's 1996 sale of
Berkshire B shares, which he created to undercut promoters who wanted to
sell $1,000 interests in a pool of Berkshire shares. Berkshire at the time
fetched about $33,000, and B shares are 1/30 of a regular share. Buffett
sold as many B shares as the public wanted at the offering price, damping
down speculation. And forestalling promoters from profiting from Berkshire.
Buffett did something similar last month, when he dumped 10,000 tickets to
Berkshire's annual meeting onto e-Bay at $2.50 each. Some sellers on e-Bay
were hoping to get as much as $100 a ticket.
The real question is whether Google, like Buffett, will be able to ignore
Wall Street's demands and go its own way. I doubt it. Buffett was
low-profile when he took control of Berkshire in 1965, and the company was
small, with fewer than a million shares available for public investors to
buy. That wasn't enough for the big-time, hot money crowd to be able to buy
and sell rapidly, so it stayed away. By contrast, Google already has 264
million shares outstanding, and will probably have more than 300 million
after the offering. Google has a workforce loaded with options; Buffett
doesn't believe in handing them out. Google will have to pay attention to
its stock price -- and thus, to Wall Street.
I love the way that Google dissed the Street in its filing -- distrusting
the Street is the right move. Going public, I fear, will prove to be the
wrong one.
Sloan is Newsweek's Wall Street editor. His e-mail address is
<mailto:sloan@xxxxxxxxx>sloan@xxxxxxxxxx
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