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intelliot
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 Posted: Fri Aug 13, 2004 2:51 pm Post subject: Confidence of founders may harm Google IPO |
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| Quote: | It takes a lot of self-confidence to start a company aimed at solving a problem that everyone else thinks has already been solved. And when it turns out the solution is a hugely successful one, it is understandable if the people who started the company only acquire more confidence in their own judgment.
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That confidence, which led to the Google Internet search engine, also is a cause of the tribulations the company has faced as it tries to go public, the latest of which concerns an interview the Google founders gave to Playboy magazine, which may have run afoul of Securities and Exchange Commission rules.
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On Friday, Google inserted the entire interview into the latest version of its prospectus, an action one securities lawyer said was unprecedented. The SEC has told Google lawyers the new prospectus had satisfied the regulator, and that the offering would not be delayed because of the Playboy issue, a person briefed on the matter said.
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The decision to grant the Playboy interview in the first place was emblematic of Google's determination to go its own way, defying conventional Wall Street wisdom.
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The company has adopted some fashionable ideas about corporate governance, such as deciding to have the chairman of the board not be an executive or employee of the company, although the board can change that if it wishes.
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But investors who want to assess the quality of the chairman are out of luck. There is no chairman now, and Google is not saying who will be chosen.
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Indeed, the one thing that comes clear in reading the prospectus for Google's public offering is that investors must trust the founders. Public shareholders will have no way to reduce the founders' control of the company, or to replace them if they perform poorly.
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Moreover, the company seems intent on not disclosing more than it must. What is Google going to do with the money, perhaps as much as $1.9 billion, it will get from this offering? It won't even give hints.
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What the company is quite happy to do is proclaim it will be different, that it will be run on the basis of "Don't be evil," as the founders, Larry Page and Sergey Brin, explained in the Playboy interview.
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The SEC does not like written publicity while an offering is pending. The company, an in SEC filing Friday, denied that it had done anything wrong and said the interview was conducted before the company filed to go public on April 29.
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The SEC sometimes responds to such perceived violations by delaying an offering until the publicity dies down. But delaying the complicated auction Google is conducting, which began Friday with registered bidders submitting bids, would have been more disruptive than delaying a normal offering.
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The Google auction process has attracted a lot of attention in part because it shies away from the sins of initial public offerings from the late Internet boom, in which the ability to get in on hot deals guaranteed quick profits - and became currency that could be used by companies and underwriters to reward their friends.
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In this case, the underwriters will have no such currency because the shares will be sold at the value set by the market. But the company has been able to reward favored employees as well as non-employees with options that were issued with low exercise prices.
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To go public, the company recruited three outside directors - all Silicon Valley insiders - who joined the board in April. They were each given 65,000 options to buy shares at $35, even though the board had concluded the market value of the shares at the end of March was $88.13.
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The company is estimating the auction will price the shares at $108 to $135 per share.
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Google's determination to adhere to its own definition of what is right has been evident in that options program, which may have violated various securities laws. It is facing investigations and has offered to repurchase options, an offer that no one will accept since those options will produce huge profits for the lucky holders.
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The company is also standing by its general counsel, David Drummond, who may not have assured that securities laws were strictly observed. Drummond has other problems. He was notified by the SEC last month that it is considering bringing a civil fraud suit against him in connection with accounting at a former employer, where he was chief financial officer. He is trying to persuade the SEC to drop the matter.
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Drummond will have plenty of money to fight those allegations, assuming this offering does proceed. He plans to sell 50,138 shares, worth up to $6.7 million, at the offering. Google's founders each plan to take out as much as $130 million.
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The founders, Brin and Page, are assured of running the company as they wish for as long as they wish. The company has super-voting shares for insiders, which it emphasizes is common for media companies like The New York Times Co., publisher of this newspaper.
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The dual-share structure will not last forever, however. The super-voting shares become regular shares when transferred, even if they are inherited upon the holder's death. Control of Google, unlike that of many media companies, will not automatically pass to the next generation of the founding families.
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But no one should bid at this auction expecting to have any influence on Google anytime soon. Page, the older of the two founders, is just 31.
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In the prospectus and in the Playboy interview, the two men promise to manage the company with a strategy oriented to the long-term, ignoring the impact decisions will have on short-term profits and refusing to issue profit forecasts.
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From where, Playboy asked, did the men get their management philosophy?
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"We try to use elements from different companies," Page replied, "but a lot of it is seat-of-the-pants stuff." |
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