While the rest of the corporate world went Google-loopy after the search engine announced its upcoming flotation, it was Warren Buffett, chairman of investment company Berkshire Hathaway and one of the harshest critics of overvalued tech stocks, who brought sanity to the situation.
At his annual address to Berkshire Hathaway shareholders in May, Buffett praised Google’s founders, Larry Page and Sergey Brin, who have admitted publicly to being influenced by Buffett’s management and investment style, but he did not go as far as recommending Google stock as a good buy. “In an IPO, the sellers decide when to come to market, so it’s way less likely that it’s going to come at a time that suits you,” Buffett said.
And he is right. Google’s founders are not putting $2.7bn of shares up for sale out of the goodness of their hearts. The Securities Act of 1934 states that private companies must report their financials within a certain period after acquiring 500 shareholders. Google was on the verge of having to report as a public company without any of the benefits of juicy capital raised from a listing. Additional pressure from venture capitalist shareholders tipped Google over the edge and into the share markets.
But Google – which includes “Don’t be evil” among its many California-flavoured mission statements – has decided to bypass Wall Street underwriters and sell its shares by online auction. Where underwriters would traditionally reserve large blocks of shares at suppressed prices for favoured clients, Google’s ‘Dutch’ auction means that all interested parties have to submit bids for available shares at a price they are willing to pay. The IPO managers will then decide the lowest fixed price at which all the outstanding shares can be sold.
This novel approach to listing has won many plaudits, none more important than from Buffett himself. Press and Wall Street commentators have branded Google’s IPO as the most hotly anticipated since Netscape’s in 1995. But will Google kick-start the new economy all over again or will it, and its shareholders, plunge lemming-like as a raft of hi-tech IPOs did in the late 1990s?
The first thing in Google’s management’s favour is that control of the company will remain with its founders as a dual voting arrangement is being introduced and it is issuing two classes of shares. A Shares will be given to the public and carry one vote each, while B Shares will be held by Page and Brin and carry 10 votes each. As each founder holds 16% of the company’s equity it will, in effect, continue to be run as if it were a private company.
Page and Brin have also publicly opposed the market pressures placed on technology companies. “A management team distracted by short-term targets is as pointless as a dieter stepping on a scale every half hour,” they said in a letter to potential investors. Google will also refuse to give earnings forecasts and has no plans to pay a dividend.
But there is a sense that the IPO-starved markets have gone slightly Googley over all this rhetoric. Latest estimates suggest that the US search engine post-IPO will be worth anywhere between $25bn and $30bn – an incredible valuation of a company with $1bn annual revenues and operating profits in 2003 of only $100m.
Even if you take into account the $455m the company has in cash and exponential growth in ad revenues, it does seem that the market’s fascination with any number that has nine zeros after it has got the better of it.
Share auctions are not without risk, either. As Buffett said in his address: “The seller of a $100,000 house in Omaha (Nebraska) will never sell it for $50,000. But if 100 entities each owned 1% of a basket of homes in Omaha, the price could be anywhere. You’re way more likely to get incredible prices in an auction market.” Buffett’s deputy chairman Charlie Munger was less eloquent: “The average person buying IPOs is going to get creamed.”
Anyone thinking of investing in Google may do better to wait and see how the online auction values its shares before entering the bidding frenzy.
After all, the person who watches how the bidding goes – not the one who bids the highest or lowest – is usually the one who wins.
Better still, potential investors should use their money to buy into a traditional investment like Berkshire Hathaway. And if they don’t have a spare $90,000 per share lying around they can bid a few dollars on eBay for a ticket to see Buffett’s next address to shareholders in Omaha in 2005 and hear the great investor first-hand – you can search for all the details on www.google.com.
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