Pressure on Google to Go Public Reflects Focus on Short-Term Gain
By Allan Sloan
Tuesday, June 29, 2004; Page E03
How would you like to make 450 percent on your money overnight, turning a dollar today into $5.50 tomorrow? That's a deal anyone would love -- and it's what Google Inc. estimates its current shareholders will make as a result of its initial public offering.
Google won't say what price it expects its stock to fetch at the highly touted "Dutch auction" scheduled for this summer. But in a footnote buried in a fat regulatory filing last week, Google says its average "deemed value" as a public company was $88.13 a share in the first quarter, compared with $16.27 as a private company. The $16.27 was the average exercise price of the stock options that Google granted during the quarter, and represented the stock's fair market value at the time.
The deemed value, which Google says is based on a variety of estimates, isn't Wall Street hype. It's Google's best estimate of the truth, which it filed with the Securities and Exchange Commission to show how it calculated the value of the stock options granted to employees since the start of 2003. (The company wouldn't comment last week, and said I was on my own when it came to interpreting the filing.)
At $16.27, the value that Google placed on itself as a private company, its 264 million shares outstanding were valued at $4.3 billion. But at $88.13, Google's value leaps to $23.3 billion. That $19 billion windfall is the increased value that current shareholders and holders of stock options can expect from the company going public.
That huge prospective paper profit, of course, explains the pressure that venture capital investors and some other shareholders have put on Google to go public. Google's two big venture capital investors -- Kleiner Perkins and Sequoia Capital -- would see their holdings valued at $2.1 billion each, a $1.7 billion increase. That would greatly enhance the return on their investment.
The higher those returns, the easier it is for the VCs to attract investors. And with Google public, the VCs can start selling off their Google stock, pocketing a share of the profits -- typically 20 percent -- for themselves.
Forget all the hype about Google setting off a new boom in tech IPOs. The Google game is for insiders to create windfall gains for themselves and start cashing in before the IPO market tanks again. Interestingly enough, there's no chance that the stock of a public Google will come close to matching the annual gains that the private Google has made.
Here's the deal. According to Google's SEC filing, the company's fair market value as a private concern has risen from 49 cents in the first quarter of 2003 to the aforementioned $16.27 in the first quarter of this year. That's a 33-for-1 return in a year. For Google to match that return as a public company, its stock would have to be around $3,000 a share by next summer. What's more, the company would have to have a stock market value of more than $750 billion, which is more than the current valuations of Microsoft Corp. and General Electric Co. combined. Somehow, I don't think that's going to happen.
The people you have to really respect are Google's founders, Sergey Brin and Larry Page, who resisted taking the company public. They seem to recognize the difference between self-interest, which is good, and greed, which almost always works out badly.
Brin and Page are obviously self-interested: Their Google stakes are currently valued at about $600 million each. But they seem to realize the problems that Google will face as a public company. So they've been willing to forgo the going-public windfall, which is worth an indicated $2.8 billion each. Good for them.
Brin and Page worry that going public isn't in Google's long-term interest. Given what has happened to so many companies that have contorted themselves to meet Wall Street's expectations, Brin and Page are right to worry. Google is doing perfectly well as a private company, and in the long term it would probably be better off to stay private.
But Google's public and private valuations prove that going public is in current shareholders' short-term interest. And on Wall Street, short-term is what it's all about. No matter how many safeguards the founders think they've erected to keep the Street at bay, the day that Google's IPO is completed, the score will be Wall Street 1, Brin and Page 0.
Sloan is Newsweek's Wall Street editor. His e-mail address is email@example.com.
© 2004 The Washington Post Company