Going Public May Be Google's First Bad Move

[Dave Farber <dave () farber net>]

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 () panix com>sloan () panix com.

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