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
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 mantra—the
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.
search engine to the phrase "evil empire" gives
"Microsoft evil" as one of the six suggested refinements—Google
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
genius—more 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 utter—Enron. 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 worked—creating
and running the market for energy products—and
tried to replicate it in other areas—broadband,
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?"
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