google: not doomed after all?

August 1, 2004 4:14 PM

Google IPO: the Prospectus. Of particular interest in this 119-page (not including appendices) monster document are the Risk Factors (there are lots) and the Letter from the Founders, an "owner's manual" for Google shareholders: "Google is not a conventional company. We do not intend to become one... If opportunities arise that might cause us to sacrifice short term results but are in the best long term interest of our shareholders, we will take those opportunities... We aspire to make Google an institution that makes the world a better place". Of course, if hardcore financial stuff is your bag, there's plenty of that, too.
posted by reklaw (14 comments total)

Telling shareholders with short attention spans to zip it is way overdue.
posted by Space Coyote at 4:18 PM on August 1, 2004

So it sounds like Google could be a great long-term investment (considering it starts at $100-something per share), if they can battle off everyone that wants a piece of them. They're being attacked on all sides by competitors and I'm just not sure if they can stay ahead forever. They've only been around about 6 years and have risen to the top, but can they stay there? At this stage of the game, we have to ask ourselves if this hot new car company is Ford, or if it's just a Tucker.

I'm probably not going to invest anything in Google, but I hope I'm not regretting reading this comment five years from now.
posted by mathowie at 4:22 PM on August 1, 2004

I don't get why everyone is ready to throw money at Google. Sure they have a lot of geek cred and sure they have a great search engine that everyone uses, but big deal. Everyone already uses it. They're at their peak right now. Microsoft and Yahoo are coming in and competing now, and no matter what, even if Microsoft and Yahoo come out with only marginally better search engines than what they have right now, it's only going to hurt Google's profits. If Google doesn't diversify... their stock can only go down. At least that's my opinion.
posted by banished at 4:40 PM on August 1, 2004

That's GOOG to you, trharlan...
posted by reklaw at 4:42 PM on August 1, 2004

If Google doesn't diversify... their stock can only go down.

This is generally what people were saying about Yahoo a few years back, and Google is generally perceived as being more business savvy than Yahoo was at a similar point in its history. Also, I haven't been following the IPO market that closely, but anecdotally at least the Google IPO seems to be the only interesting offering on the calendar, and we've all seen what a little bit of hype can do short term to a tech stock's price. Good for the i-bankers, not so good for everyone else.
posted by psmealey at 5:17 PM on August 1, 2004

My favorite part of financial disclosures on the net is people freaking out over the risk factors. I'm kind of disappointed no one here is doing that.
posted by smackfu at 5:28 PM on August 1, 2004

Are there any lawyers here familiar with corporate law?

My general understanding is that corporations have legal obligation to maximize shareholder return.

Yes, long-term planning can be a part if it, but despite the "do no evil" mantra and "we're not a typical company", once they go public they can be sued by stockholders if they are believed to be sacrificing shareholder returns.
posted by Ayn Marx at 5:34 PM on August 1, 2004

As long as the board (the representative voice of the shareholders) approves the long-term vs. short-term shareholder value concept, they are in compliance. Of course, the CEO and President will have to re-sell this concept to the board 4x per year, but that's another issue.
posted by psmealey at 5:46 PM on August 1, 2004

That's been my impression, too, AM. But I think that's because most corporations, in order to raise their stock price, claim that they're working for short-term gains (not in so many words, perhaps). If the prospectus or whatever states, "The purpose of FooCorp is to piss money down the drain as fast as possible", and people buy stock in that, I don't think the stockholders can sue FooCorp for holding to its publicly-stated plan.

But I'm not only not a lawyer, I mostly don't even pay attention to investment stuff.
posted by hattifattener at 5:47 PM on August 1, 2004

Also, user traffic tends to be seasonal. Our rapid growth has masked the cyclicality and seasonality of our business. As our growth slows, we expect that the cyclicality and seasonality in our business may become more pronounced and may in the future cause our operating results to fluctuate.

Hmm. Are they talking about people going outside in the summer? (This is actually fairly interesting reading; not at all what I was expecting. Ah, refreshing honesty.)
posted by Tlogmer at 6:08 PM on August 1, 2004

Are there any lawyers here familiar with corporate law?

*raises hand*

Yes, long-term planning can be a part if it, but despite the "do no evil" mantra and "we're not a typical company", once they go public they can be sued by stockholders if they are believed to be sacrificing shareholder returns.

Yes and no. The problem you pose is one of the great puzzles of existing corporate law doctrine: the coexistence of the strict duty of management to maximize profits and the "business judgment rule," the practice of courts to review management decisions with great deference.

Professor Bainbridge has a whole category of posts about the business judgment rule. This post is somewhat apropos, particularly the third and fourth paragraphs:

Generally, corporate directors and officers owe their firm and its shareholders three basic fiduciary duties: care, loyalty, and good faith. See, e.g., Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 361 (Del. 1993). Of these, the duty of care is most relevant for present purposes. The duty of care requires corporate directors to exercise “that amount of care which ordinarily careful and prudent men would use in similar circumstances.” Graham v. Allis-Chalmers Mfg. Co., 188 A.2d 125, 130 (Del.1963). Central to the duty of care is an obligation for directors and officers to avail themselves, “prior to making a business decision, of all material information reasonably available to them.” Aronson v. Lewis, 473 A.2d 805, 811 (Del. 1984); see also Smith v. Van Gorkom, 488 A.2d 858, 872 (Del. 1985). Where the directors have so informed themselves, however, judicial review of their decisions and actions is precluded by the duty of care’s chief corollary—the business judgment rule. [NB: In addition to an informed decision, there are a number of other preconditions that must be satisfied in order for the business judgment to insulate a board’s decisions or actions from judicial review. See generally Stephen M. Bainbridge, Corporation Law and Economics 270-83 (2002) (discussing preconditions).]

The business judgment rule, of course, is a presumption that the directors or officers of a corporation acted on an informed basis, in good faith, and in the honest belief that the action taken was in the best interests of the company. Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984). “While it is often stated that corporate directors and officers will be liable for negligence in carrying out their corporate duties, all seem agreed that such a statement is misleading. . . . Whatever the terminology, the fact is that liability is rarely imposed upon corporate directors or officers simply for bad judgment and this reluctance to impose liability for unsuccessful business decisions has been doctrinally labeled the business judgment rule.” Joy v. North, 692 F.2d 880, 885 (2d Cir. 1982). See also Kamin v. American Express Co., 383 N.Y.S.2d 807 (Sup.Ct.1976), aff’d, 387 N.Y.S.2d 993 (App. div.1976) (holding that the duty of care “does not mean that a director is chargeable with ordinary negligence for having made an improper decision, or having acted imprudently”); Bayer v. Beran, 49 N.Y.S.2d 2, 6 (Sup. Ct. 1944) (stating that “although the concept of ‘responsibility’ is firmly fixed in the law, it is only in a most unusual and extraordinary case that directors are held liable for negligence in the absence of fraud, or improper motive, or personal interest”).

When a shareholder plaintiff cannot overcome the presumption that the directors and officers "acted on an informed basis, in good faith, and in the honest belief that the action taken was in the best interests of the company," that plaintiff will be unable to recover on behalf of either the corporation or the shareholders, despite the fact that there may have been a plausible alternative course of action that might have been more profitable for the corporation. Professor Bainbridge has a more detailed post about the function of the business judgement rule here, based on his forthcoming article The Business Judgment Rule as Abstention Doctrine.
posted by monju_bosatsu at 6:20 PM on August 1, 2004

Until such time as they see fit to say what they intend to do with the $1.6 Billion they expect to bank on this deal, I have no interest. I can think of much better ways to spend $13,500 than 100 shares of Google, including several that pay dividends.
posted by ilsa at 10:07 PM on August 1, 2004

We aspire to make Google an institution that makes the world a better place...

... for Google.

I suppose that, since this is a primarily financial post, it's appropriate that only financial risk factors have been discussed so far. But what astonishes me is how uncritically the "not-evil" line is bought by the great cleanly-scrubbed masses of Blogistan and Netsville.

Google may or may not be financially successful in the terms of prior IPOs; I don't know. But I have little doubt that they will be successful in accomplishing their corporate aims. And those are, by extension, no less than the reshaping of the way that people think about communicating with other people.

Look at the tools they're laying into place: Google search (in its multiple ramifications), Gmail, Orkut. All are tied together by the idea that the best way to find something is by searching an automated index for it -- that in turn underpinned by the idea that the best way to derive the "value" of something is to look at the easily measurable characteristics of that thing (how often people link to or look at it, how many layers of acquaintence stand between you and a given person, etc.) in an automated, non-human-mediated way*. You'll determine the value of your [human] contacts via Orkut ranking; that ranking will be linked into your GMail account so that message content from closely-linked individuals can be more heavily weighted than that from distantly-linked individuals (to better optimize ad delivery). And you will accept this because it "delivers value". As though the faustian bargain of advertising for information was ever an uncritical good.

Point being, Google wants to reshape your habits so that they're more amenable to Google's business model. And they'll probably succeed, at least to an extent that will make them tons of money. I mean, for pete's sake, people were lost when they couldn't run a Google search for an hour or two last week....

And that's just the beginning. When the human behavioral data they've already amassed is properly integrated with the new tools and data-aggregation streams (networking, email, purchasing), they'll be unstoppable. I don't know whether they're evil -- I don't actually believe in evil -- but this is sure enough the sort of grandiose thing that evil geniuses always do in movies.

(*To the objection that Google's ranking systems are fundamentally human-mediated, I respond: Please think that through. They are human mediated in the same way as reactive marketing research. The aggregate mass action and reverse-abstract it to individual circumstance. They do not admit of active choice, or individual preference, or -- most important -- true serendipity. Serendipity, after all, is not very useful, as "James Tiptree" pointed out. I really wish that extropians and transhumanists would get out and breath fresh air with other people a little more. Join a beer league softball team. Have some barbecues. Meet people you wouldn't otherwise meet, in circumstances you don't choose...)
posted by lodurr at 3:44 AM on August 2, 2004

You'll determine the value of your [human] contacts via Orkut ranking

Wow, so may be that's what Cory was aiming for with his wuffie idea. Seems obvious now, but seem kind of foreign when I first read about it.
posted by piskycritter at 9:42 AM on August 2, 2004