|Another Article on a Possible Google IPO|
This time Red Herring Comments
|First and foremost, Google is not likely to go public any time soon. Quite simply, it doesn't need to. For starters, the company has raised $40 million since 1999, primarily from Sequoia Capital and Kleiner Perkins Caufield & Byers. And from what little information Mr. Schmidt does reveal, Google has enough cash coming through the door to comfortably continue on its current trajectory. If Google wants to acquire other companies, it might need to go public, but there has been no indication at present that Mr. Schmidt wants to pursue that strategy. |
|A more likely scenario is that Google and Salesforce.com will remain private until they want cash for reasons beyond their general operating needs. That might not even happen this year. If it does, though, it will set the stage for only a slow IPO trickle of solid companies--not a rush of wanna-bes. |
It seems the only argument for going public is that the Venture Capitalists might want an exit.
They must be pretty smart guys if they are the ones who funded Yahoo as well. I'm sure they know how to time an IPO. Now is only the time for the desperate or the disillusioned.
The venture capitalists might also want to be able to quantify what their investment in Google is worth. Without public trading, this isn't really possible.
If Google can avoid an IPO, they're smart to do just that. I've seen several solid businesses go south just a few quarters after going public - in fact, I was on board for one. That was one of the ugliest chapters in my professional life.
Publicly held businesses tend to live from quarter to quarter. There's less attention for doing things well than there is for "profits right now".
It would be a rare board of directors that really understood how Google built their brand and how to maintain it.
|It's a seductive scenario--too bad it won't happen. First and foremost, Google is not likely to go public any time soon. |
Quite simply, it doesn't need to.
|Estimates for Google's revenue in 2003 are as high as $400 million, with gross margins in the range of 70 to 80 percent |
just shy of the Internet's other star, eBay, which regularly posts gross margins of 80 to 90 percent.
They might not IPO this year, but employees sooner or later want real money and real evaluation for their options.
>>but employees sooner or later want real money and real evaluation for their options
Won't the real value be determined by dividends? After all, that's what shares are valued upon. Once they receive their shares they will be free to trade them regardless of whether Google IPOs or not. The secondary market for those shares will give a valuation, even if the market will be very thin.
The valuation all depends on the option contracts and American law.
Some contracts have given rules when pre-IPO.
For example you would only be allowed to sell after five years of getting the options.
If the shares are still not on the public market, the contract might state that you can only sell back to Google at a given price earning per share.
Valuations of stocks are rarely done on dividends, more on price earning ratios depending on future growth prospects and the hype of the stock market.
>>For example you would only be allowed to sell after five years of getting the options.
Yes, but once you own the shares you can do what you like with them from the moment you receive them. I agree that valuation of the options is a problem without an underlying stock price, but many companies who never floated have systems to get around this.
>>Valuations of stocks are rarely done on dividends, more on price earning ratios depending on future growth prospects and the hype of the stock market.
I have to agree and disagree here. The ONLY factor which theoretically determines a stock price is future dividends. Ask Warrent Buffet about that one. Sadly, I think you are right, and the current "valuations" of stocks depends on hype. I'd rather not use the term valuation in this case, since the people setting the values are not valuing anything.
The only value placed on a stock is what a buyer and seller are willing to exchange for. Without an IPO, there is no market. You can't just trade shares in a company. Under the applicable law in most countries, there has to be a registration, an audit, etc. So there is no sale of stock until an IPO. In other words, if my brother were working for Google, had shares and wanted to sell me his shares, he couldn't.
Generally when a stock is closely held like Google's, there is an annual quicky-valuation peformed which sets the value of the stock. My employer used a modified book value before we went public. If someone were to leave or be fired, they would be required to sell the stock back at the calculated value. The same should be true of vested options. There is likely a formula.
Generally it is not the employees' calls which result in an IPO. Typically the decision and timing of an IPO are driven by venture capitalists who provided the funding for the company in the first place. These guys get their money from other people by telling them that they'll return 30% annually or some such. They usually have a short turnaround time necessary before they get the itch to take the thing public. I dunno if there are VCs involved with G but if there are, chances are that there will be an IPO. If there aren't and the company is making tons of money, there are other ways of keeping employees financially happy.
As to dividends, dividends are largely an admission that a company doesn't have anything better to do with its money. If you have ideas that can turn 1 buck into 2 quickly, I don't want you to pay me a dividend. I want you to make the 2 bucks and keep doing just that. The whole thing works on the idea that one day you will make so much money that you will have to pay a dividend. But the vast majority of companies, successful and otherwise, never pay a dividend.
Dividends are cropping up at some companies which might be able to do more with their money if they didn't pay a dividend. But these companies are largely paying dividends as a ploy to drive stock price because so many individual investors falsely believe that dividends are somehow important. It's a circular sort of thing.
>>if my brother were working for Google, had shares and wanted to sell me his shares, he couldn't.
Not in my neck of the woods. If I own shares in a private company, I just need to trot along to a notary with the company deed (publicly available) and the company register (my share numbers) and I can sell them to whom ever I please. The one caveat is if the company deed mentions that existing shareholders must be given first refusal. That well may be the case for Google.
>>As to dividends, dividends are largely an admission that a company doesn't have anything better to do with its money
Whatever happened to financial discipline? Didn't you hear the fable of the Russian son who kept coming back to his father saying his business was growing so fast he needed more money to invest?
>>But the vast majority of companies, successful and otherwise, never pay a dividend
Really? And how do the investors realise their capital then? Share buybacks? Those are the minority. Ultimately a company must pay a dividend. As in the case of IBM it may be 20 years from the outset, but as in Newton's laws of gravity, if a company never pays a dividend, it's stock must eventually come down. No exceptions. If you know of one, let me know.
I agree that to the amateur investor the stock price today is the stock's value, but to a prefessional (say) pension fund investor the true value is discounted future cash flows and nothing more.