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Is Google the Anti-Enron?


Ross M. Miller
Miller Risk Advisors
August 23, 2004

Don't be evil. I wonder what they meant by that. Actually, those Google folk were clever. These three words, which were front and center in the first edition of the Google prospectus, seem to be all that registered on many members of the financial media. (In the final version, which included the offering price of $85, they were moved back to page 32.) I have found  no explanation of Google's mantrathe financial press merely restates as though it epitomizes the Googliness of the enterprise that went public this past week. Well, I'm game. This week, I deconstruct Google's mantra and comment on some of the good stuff that lurks in the bowels of Google's prospectus.

There is no getting around the fact that "Don't be evil" is a slam at the way business is typically done in America. (Memo to McDonalds: How about "Wash Your Hands After Using the Restroom" as a corporate slogan?) Now Google's mantra could be a reference to Microsoft. (Applying Teoma's search engine to  the phrase "evil empire" gives "Microsoft evil" as one of the six suggested refinementsGoogle does not suggest refinements.) In light of all the money that Bill has given to Stanford (and its computer science department, in particular), this interpretation would seem most ungracious.

The Playboy interview in Appendix B of the final prospectus is not very helpful. (Whoever thought of including this interview was a geniusmore companies should do this to liven up the documents that they file with the SEC. And why stop at interviews?) According to Eric Schmidt, Google's CEO, who the prospectus tells us on page 101 is nice enough to let his Googlepals fly on his time-shared business jet at discount rates, "Evil is whatever Sergey [Google's cofounder] says is evil." I knew that the liberal arts faculty of Stanford was big on moral relativism, but this takes that concept to a new level. Please remind me, what is the definition of hubris?

The reason that CEO Schmidt dodged the "evil" question is another E-word that no CEO dare utterEnron. In the post-Enron world, "Don't be evil" cannot be taken for granted. Furthermore, on closer inspection, Google and Enron are about as opposite as two companies get. "Don't be evil" sounds nicer than "We are the anti-Enron."

Consider a tidbit buried deep inside Google's prospectus. On page 87, we are informed that cofounder Larry Page served as Google's Chief Financial Officer from its inception in September 1998 until he resigned that post (no reason given) in July 2002. Aside from the fact that it is unusual for any cofounder of a technology company to serve as its CFO, Larry decided to call it quits the same month that the Enron Act, a.k.a. Sarbanes-Oxley, was signed into law. I think that this is a wise move when page 18 of the prospectus states: "Shares issued and options granted under our stock plans exceeded limitations in federal and state securities laws." Why did Google appear to dodge securities laws? The answer is given on the next page: "[C]ontinued compliance under Rule 701 would have required broad dissemination of detailed financial information regarding our business, which would have been strategically disadvantageous to our company." If going public was a bad idea for Google before Sarbanes-Oxley, it was an even worse idea after it now that jail time enters the picture.

And that is Google Mystery #2: Why go public? This question is not asked in the Playboy interview and it is not answered anywhere in the prospectus. Google is not hurting for cash; indeed, it's a cash-flow fountain. Enron, on the other hand, always had one hand on the ATM, but then it had a business plan hatched at the Harvard Business School and refined by McKinsey. Enron took an idea that workedcreating and running the market for energy productsand tried to replicate it in other areasbroadband, water, etc. And Jeff Skilling might have pulled it off if not for bad timing and even worse oversight of Andrew Fastow and Rebecca Mark. Enron may have screwed up its business plan, but all evidence points to Google not having one at all. Or, if they have one, it's a secret. In that case, it's probably one of many secrets better kept inside a private company.

Of course, everyone knows that Google went public so that its investors could recoup their investments and then some. I don't fault them for that. Especially when page 103 informs us that Roger J. Ebert (yes, that Roger Ebert) and Chaz Ebert (his wife) are selling 2,019 of their 20,192 shares. But there must be some other way to get the money. What would a brilliant CFO do? What would Andy Fastow do?

One answer: Securitize searches. Why securitize the whole company, when what's making the money is ads that appear in the searches? Just think of what you could get for "Paris Hilton" or even "Ben Affleck" if you turned the searches for those phrases into securities. And if the SEC or Eliot Spitzer bugs you, you can place these securities privately a la Enron. But let's face it, something like this would never occur to the Googlers because Suze Orman is a thousand times more financially sophisticated than they are. (If you think I'm insulting Suze, feel free to substitute "million" for "thousand" in the previous sentence.) Oh, and I forgot, asset securitization is evil if Sergey says it is.

Lack of financial sophistication is not the only way that Google is the anti-Enron. Owners of Enron stock at the time of its collapse had full voting rights; new Google shareholders only get second-class stock with fractional (one-tenth) voting rights that are essentially worthless. (Minority shareholders cannot get seats on the board of directors and it is impossible for outsiders to gain control of the company.)

Google has no directors that by any stretch of the imagination can be considered independent. (A former president of Stanford, not to be confused with the one who resigned because of allegations that the university overcharged the federal government, does not count as independent because both he and Stanford were involved with the company from its birth and retain a substantial stake in it.) Enron had some independent directors and (though the press and authors of competing books on Enron won't tell you this) one of them, Wendy Gramm (former chair of the CFTC), is said to have insisted that the board turn the company into the feds. (You didn't think that anyone at the SEC or in the financial media actually caught them and Enron's so-called whistle-blower never blew her whistle to the feds.)

So, am I saying that Enron was a "good" company? No way. Enron was, by its very design, an amoral company. More than that, it was a flawed amoral company. Google plans to impose its notion of morality on others, including its shareholders who are free to sell their Google shares if they disagree with Google's notion of morality. It is possible, however, that Eric, Larry, and (especially) Sergey have seen the light and will lead American business into a new age of truth, beauty, and fractional voting rights for the public.

Am I done with Google? Not by a long shot. While it's fun to make fun of Google, they are a good company with the potential of becoming a great company if they can surmount the several pages of business risks contained in their prospectus. And if their stock goes up ten or a hundred times, no one remember all the grief they are getting now. So next week, I'll get real and pose the pointed question: "What Will Google Be Worth on November 30, 2004?"

Copyright 2004 by Miller Risk Advisors. Permission granted to forward by electronic means and to excerpt or broadcast 250 words or less provided a citation is made to