The long-awaited documents Google filed Thursday to register for an initial public offering (IPO) of its shares illustrate just how unusual the company's founders are in their approach to steering one of the tech industry's largest and most influential businesses.
First, there's the auction process the company plans to use to sell its shares. Financial analysts have for months alternately fretted and enthused about the potentially massive valuation Google will sport when its shares first begin trading. The dot-com boom's stock-market mania was fueled in part by the two-tiered structure traditionally used to sell IPO shares: The small number of insiders with access to shares at the price set by the IPO's underwriters can flip their shares and immediately offload them to open-market buyers. For companies with pent-up buyer demand, the price disparity can be huge. VA Linux Systems Inc. set a record in 1999 when its shares opened at US$30 but ended their first day of trading at US$239.25. The company, now VA Software Corp., never again saw closing prices that high, and shares now sell for about US$2.50.
Google's complex auction process is intended to cut out the favoritism in IPO share allocation, and to open the shares at around the price set for them by the market. Analyst Tom Taulli, author of "Investing in IPOs," calls it an unprecedented move: "To me, it was a complete shock that they would go down this road. It sounds like they're such a choice client their underwriters will do just about anything for them. Everything about this IPO is just not normal."
Google's deviation from normal is evident throughout the regulatory filing describing its corporate structure and plans for going public. The document opens with a letter from Google's founders titled, "'An Owner's Manual' for Google's Shareholders." It emphasizes the founders' ambivalence about taking Google public and their determination to keep control of the company's development, even at the risk of alienating investors.
Google will have a dual-class voting structure giving the management team 10 votes per share, a tactic aimed at ensuring that Google's creators continue running the show even if they lose majority ownership. Such a structure is rare among public companies and unpopular with good governance advocates, who see it as an undemocratic way of concentrating enormous power in the hands of a few. That's precisely what Google's founders want: "As an investor, you are placing a potentially risky long-term bet on the team, especially Sergey (Brin) and me," founder and Co-President Larry Page wrote in the letter, signed by both him and Brin.
Brin and Page openly eschew other traditions from the rule book of good corporate citizenship. They don't plan to provide earnings guidance, the set of sales and income forecasts company executives hand out to analysts each quarter. Nor do Google's founders intend to aim for consistency in their financial results.
"If opportunities arise that might cause us to sacrifice short-term results but are in the best long-term interest of our shareholders, we will take those opportunities," they wrote. "Many companies are under pressure to keep their earnings in line with analysts' forecasts. Therefore, they often accept smaller, but predictable, earnings rather than larger and more unpredictable returns. Sergey and I feel this is harmful, and we intend to steer in the opposite direction."
Google's famously employee-friendly culture is another area the founders deemed off-limits to changing to appease investors: The company chefs and washing machines will stay, they proclaim: "Expect us to add benefits rather than pare them down over time. We believe it is easy to be penny wise and pound foolish."
The quirkiness may spook traditional investors -- Taulli said he wouldn't buy shares, and he expects Google to have trouble on its pre-IPO road show convincing institutional investors that buying in at the IPO is a risk worth taking.
But the company's insistence on maintaining its iconoclastic practices is a good sign for its customers. Meta Group Inc. analyst Tim Hickernell said he doesn't expect Google to sacrifice its products for profits. The IPO is likely to strengthen Google by giving it a war chest to use on development and acquisitions, he noted.
"This has been very well-planned for a number of years now. The company has been gradually evolving to become more mature," he said. "It was very obvious from that letter -- I call it 'Larry and Sergey's Manifesto' -- that they intend to resolve any fears of their core users."
Google's challenge will be to prove that a company can edge toward the Fortune 500 and still place a higher value on its products and employees than its share price. The founders' letter lists "don't be evil" as a critical Google value and strategy, and cautions investors that Google will sacrifice short-term gains as needed to be "a company that does good things for the world."
The maverick melding of high finance and geekery starts right on the cover page of Google's mammoth IPO filing. The maximum price for the share offering isn't a nice round number. It's US$2,718,281,828 -- which just happens to be a multiple of the mathematical constant e. It's a number that's irrational. And transcendental.