Web Informant #369, 5 May 2004:

Google Leads the Way




Before I get to my sermonette on Google and Quattrone, first a word of appreciation and thanks to Bob Edwards. Not someone in our industry, but someone in my life for the past 20-something years. Bob was the host of NPR's Morning Edition radio news show: we both got our professional starts in Washington, D.C. in the late 1970s. Over the years he started more of my weekday mornings than not, and I got used to hearing his wonderful voice and takes on the news. Although I am someone totally uninterested in sports, I found his weekly conversations with former sportscaster Red Barber fascinating and an inspiration for my own interviewing technique as a journalist. Bob was forced out of his anchor slot last week (although he will still contribute the occasional piece) and I, along with many other listeners, will dearly miss him. NPR is ostensibly trying to make the station more “hip.” Do the powers that be not realize that the appeal of NPR is that the programming is directed at pointy-headed liberals? Here's a tribute that the network has put up with links to some of Bob's more memorable pieces:



Now to other comings and goings. I think the financial industry has turned a new chapter. I might even go so far as to hope that a new breed of honest analysts and bankers is upon us. Gone (hopefully for good) are the dark days of the post-go-go years. And, just like with the departure of Sanjay from Computer Associates, we now have a couple of new data points with the impending Google IPO and the conviction of Frank Quattrone for lying to the Feds.


Here's why these events are so important: Finally, we have validation that the days are over in which investment bankers view themselves as above the law, and can dictate terms to their nascent public companies. While Quattrone wasn't convicted of any insider trading, he did delete e-mails that he sent to his co-workers and did present a less-than-satisfactory picture on the witness stand.


Face it: Bankers do apportion the IPO offerings of the hot companies to their favorite clients. It is done all the time. When I did some consulting work for one client in the go-go years, I got to witness exactly how it was done. It is a closed ecosystem: First, you appoint your friends and close colleagues to an advisory board and board of directors. Then you cozy up to the bankers and start to position your message to the analyst community. You bring in the right venture capitalist team, who also have connections to these people. When you are ready to go public, those who are "friends and family" get an opportunity to share the wealth and buy at opening day at the initial price. The really lucky ones have option contracts that can deliver almost instant wealth (well, you have to wait typically six months after the offering, but still, it is nice work if you can get it).


When I was a consultant, several of my clients paid me in shares. Many of these shares are nice pieces of paper and not much more. But a few did deliver: One company was bought by Yahoo and I got a few bucks out of that deal. One company went public and its stock soared into the stratosphere, and I managed to sell a few shares and pay off my mortgage. I am grateful for that. (The deal also helped to sour and end my marriage, and now I am grateful for that as well, but that is a story for another time.) My point in all of this is that the perception of an open, public marketplace where stocks are traded freely with equal access to information just doesn't exist, and we should stop pretending otherwise.


We do know that Quattrone did delete those e-mails during the course of an investigation. What bothers me is that these "masters of the universe," as Tom Wolfe has called the investment bankers, feel that they are above and beyond the laws that you and I have to deal with. Hopefully, this conviction demonstrates otherwise. A VC from Silicon Valley was quoted in yesterday's Times saying the feds "wasted a lot of time and effort over something that's not very significant." He is missing the point. If the bankers are above the law, then why stop there?


But his conviction is just part of the news: the other item is how Google is taking itself public, and how it managed to dictate its own terms to its bankers. The search company has done several clever things, all noteworthy. First, they got the bankers to cut their ridiculous fees. They are still getting paid in the millions of dollars, but at a lower overall percentage of the deal. I think this is a delicious irony, showing the power of the market: If the bankers don't offer enough services for their clients, they shouldn't be paid.


Second, given the already superheated hype of this offering, the company has decided to capture more of the revenue from its initial offering by holding an auction for the right to own shares. Most IPOs transfer wealth on the first day to the lucky few people who can get in on the offering (see my earlier comments). None of this money goes into the corporate coffers, and much of the trading activity also benefits the stockbrokers who handle those initial shares and get their commissions on the short-term trades. By holding an auction, Google will drive its IPO price to what the market will bear, and will reap more of the earnings from the sale. That is how it should be. After all, this is the reason that companies go public to begin with: to raise a bunch of cash.


The third interesting angle of the Google IPO is how the company has created two classes of shares: one for its executives, and one for the rest of us. The commoners' shares are diluted, meaning that the insiders retain a tremendous control on the company, even for a public company. Again, this represents a break from the long capitalist tradition, and of course the investment community is not totally happy about this state of affairs. I say it’s about time. A company should decide how it should be run, public or not.


The biggest surprise in all the hundreds of pages of Google docs is how much of a cash machine the company has been, and how quickly it has grown as of late. The company raked in more dough for its online ads than Yahoo, and is well on track to eclipse eBay as the most profitable and highest valued Internet company. That caught many of these so-called analysts by surprise. (Where have they been these past several years, catching up on their golf games?) All of that means no more business as usual.


Google’s two founders created the company out of a research paper they were working on at my alma mater, Stanford. They are both pretty smart young fellas. I wonder if they’ll be tuning in to the new NPR. Yo, Bob, maybe you can do an interview.


Entire contents copyright 2004 by David Strom, Inc.

David Strom, dstrom@cmp.com, +1 (516) 562-7151

Port Washington NY 11050

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