What Will Google Be Worth
on November 30, 2004?
Ross M. Miller
Miller Risk Advisors
August 30, 2004
If you are a student in one of the MBA financial management classes that I
am teaching on Mondays and Thursdays this fall (in lieu of posting more
chapters of Rigged now that
none are left), you know (or will soon know) what the title of this week's
commentary refers to. Following the trend toward reality programming in
television, I am taking a bit of reality into the classroom.
My first "Reality Challenge" asks students to predict the
price of a share of Google stock at the close of trading on November 30.
These predictions are due by 6pm on Sunday, October 31. Students must also
create an "optimal hedge" for Google designed from a basket of
over a dozen securities that include QQQ, SPY, MSFT, YHOO, and GE. Out of
100 total points: 5 are given for the accuracy of the price prediction, 20
for the accuracy of the hedge, and 75 for explaining it all in 1,000 words
or less. Of course, Google will not have much of a price history, there is
a Presidential election immediately after the predictions are due, as well
as other twists that my students are expected to discover for themselves.
My students have me, the textbook, and everything out on the Web to
rely on in their search for the Google's future price. The new post-Enron
edition of their textbook, Financial Management by Brigham &
Ehrhardt, informs students that the function of the corporation is to
maximize stock price. The book tells them "Don't be Fastow"
(they don't use these words), but there is nothing in there about Google's
"Don't be evil." If anything, the textbook indicates that
corporations should not inflict moral judgments, not even Sergey's, on
their shareholders if in the process they hurt the stock price.
One should bear in mind that finance textbooks live in a strange world
where some of the most important financial decisions that a company can
make—how to finance itself and how much to pay in dividends—are, in
the words of the late Franco Modigliani and Merton Miller (no relation),
irrelevant. As a result, if a company's CFO—let's call him Andy—gets
his company into debt problems, shareholders can undo this leverage by
holding a bunch of T-bills along with Andy's stock. If Andy is cheap and
won't pay dividends and instead uses the money to buy Brazilian water
projects, you can sell some of your shares of stock, call it a dividend,
and be happy as a clam until the IRS shows up, at which point you can ward
them off with your trusty "tax shield."
In the same vein, shouldn't there be some kind of moral irrelevancy
theorem. Any do-gooding on Google's part can be easily undone in the
marketplace. Owners of Google stock should make it a point to go down to
their local Wal-Mart and buy lots of guns if they disagree with what
Sergey thinks is good.
Google's problem is that the textbook may well be right on this one.
Consider the former knight-errant of corporate do-gooding, Ben and
Jerry's. It is now a minor subsidiary of Unilever, exactly the kind of
company that it once characterized as "evil." However admirable
or misguided Ben and Jerry's policies were and despite employing a host of
anti-takeover measures, the company's stock ultimately fell to the point
where the only choice was capitulate or die. In the rain forest of the
financial markets, one should rely on the fact that no good deed goes
unpunished unless, of course, the contents of one's investment portfolio
are a topic of interest to St. Peter.
The real problem with finance textbooks is that they have no sense of
how survival of the fittest works in financial markets. (Fundamentalists
need not worry; I am not talking about "evolution" here.) The
economic forces that inspire many of the textbook theories are
sufficiently powerful to dispatch most forms of suboptimality with
dispassionate rapidity. Google's "lapses" while it was going
public have undoubtedly already cost the company billions of dollars in
market value and as they say: "a billion here and a billion there and
soon you're talking real money." Unless Google has learned its lesson
from this experience, a similar misstep while going up against the likes
of Microsoft could prove fatal. (The reader is free to imagine a suitable
aphorism involving "learning from history." I cannot be expected
to do all the work for you.)
As one who has not only worked for many years in corporate research and
designed his own fictional research utopia based on that experience—Alaska
in Rigged—I am concerned that Google's obsession with morality
will interfere with its ability to innovate. In choosing a motto for
Alaska, "Don't be evil" would never have occurred to me.
"Do good stuff" was the obvious choice. Although GE's Corporate
R&D center never adopted "Do good stuff" as its slogan, the
phrase was frequently said, though less frequently meant, when Jack Welch
was going through his "boundaryless" phase. Indeed, the problem
that technology companies have when it comes to innovating is that they
place boundaries on that innovation.
In their prime, GE, IBM, and AT&T really had an "anything
goes" attitude toward research—a truly boundaryless vision. The new
generation of technology companies that have taken over from them have a
more limited and limiting view. The attitude seems to be "invent
whatever you want as long as it works with our hardware or our
It is hard to see how Google can attract the best and brightest to its
effort (another form of suboptimality), if it is unable to see beyond the
search business. Nothing in its prospectus indicates that Google has and
until it does the ghosts of Ben and Jerry will haunt the company and leave
half-eaten containers of Chunky Monkey in the freezers.
[Having become an official member of the labor force (represented by
a union, no less), I will take Labor Day off and return with a new
commentary the following Monday. At that time, I will reflect on what I
learned from being an online novelist in a piece tentatively called,
"A Rigged Summer."]
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 www.millerrisk.com.