All Business

MADNESS, GREED & GOOGLE

Tech mania resurfaces as a search site goes public-for US$29.7 billion

STEVE MAICH September 6 2004
All Business

MADNESS, GREED & GOOGLE

Tech mania resurfaces as a search site goes public-for US$29.7 billion

STEVE MAICH September 6 2004

MADNESS, GREED & GOOGLE

All Business

Tech mania resurfaces as a search site goes public-for US$29.7 billion

STEVE MAICH

STOP ME if you’ve heard this one before: an Internet company with a great brand name, cool design and charismatic management sells shares to the public and is instantly rewarded with a stratospheric valuation. Small investors, with dollar signs in their eyes, can’t get enough and bid the shares up even higher while market speculators hop in and out, making a mint off the frenzy. If you’re thinking this is the story of the late 1990s dot-com mania, you’re right. And if you’re thinking it’s the story of the past two weeks, you’re right again. Googlemania has arrived. If you want to get in on this little party, it helps to have a

short memory. And lucky for Google, it appears many people do.

Now, before you start screaming about how it’s different this time, let us acknowledge that Google does have a far better business than most of the pooches that were brought to market in the late 1990s dot-com madness. The company had US$1.35 billion in revenue through the first six months of this year, which produced a bottom-line profit of US$143 million, both of which were sharply higher than last year. Obviously, Google isn’t a stinker like Pets.com. But that doesn’t mean it’s a good stock pick, especially at more than US$100 a share.

In its first three days of trading, Google shares rose 29 per cent, from an initial price ofUS$85 to US$109.40, and traded as high

as US$113.48. On its first day on the Nasdaq, Google shares changed hands 22.3 million times, which is pretty amazing considering Google only sold 19.6 million shares in its offering. In other words, the speculators and traders were having a field

day hopping in and out of the stock as it climbed skyward, and for one blissful day on Wall Street it was like 1999 all over again. By the end of trading on Aug. 23, the company’s market value was US$29.7 billion.

But as always, the hangover isn’t so much fun. Especially when you start to ask yourself questions like, is Google really worth US$30 billion? That’s a tough number to wrap your head around. Think of it this way: it’s substantially more than Nike, Gap, and Nextel Communications are worth, even though each of those companies had at least 10 times higher sales than Google did

last year. More importantly, it’s 30 per cent more than General Motors Corp. is worth, despite the fact that GM made a profit of US$3.8 billion last year. That’s twice as much profit as Google had revenue last year, and yet the search engine is worth billions more than the car maker.

And it’s not just a wonky valuation ringing the alarm bells. Google was conceived by founders Larry Page and Sergey Brin when they were university students at Stanford in the late 1990s. Nobody doubts their genius, but sometimes they seem to think they’re still running the company out of a dorm room.

Two weeks before its debut on the Nasdaq, the company revealed that it had issued 23 million shares and five million stock options

SPECULATORS and traders had a field day hopping in and out of the stock as it climbed skyward, and for one blissful day on Wall Street it was like 1999 all over again

to more than 1,000 current and former employees, but failed to register them with regulators as required by law. That’s the kind of little oversight that can get you slapped with million-dollar fines and lawsuits, and now the Securities and Exchange Commission is looking into the matter.

Just as people were getting over that surprise, the latest issue of Playboy magazine hit newsstands, featuring an interview with Brin and Page. That might not seem like a big deal, but when you’re about to sell shares to the public, you generally do your talking exclusively through regulatory filings, to

avoid the appearance of selective disclosure or inappropriate promotion of the stock. The company insists it didn’t break any rules, but acknowledged it might face lawsuits from irritated investors. Was the Playboy interview youthful naïveté, arrogance, or both? In 2001, Brin and Page hired industry veteran Eric Schmidt to be CEO and to impose some order on Google’s organizational chaos. Where was he when the founders decided to chat with Playboy just before filing a billion-dollar public offering?

Other problems run deeper. Institutional Shareholder Services, a major U.S. advisory firm for big pension funds, roasted Google recently, identifying 21 weaknesses in the way the company is run. For example, more than one-third of the board of directors are either insiders or closely related to insiders, and an unequal share structure gives insiders like Brin and Page effective veto power over all major corporate decisions. ISS gave Google a corporate governance score of 0.2 out of 100, worse than any company in Standard & Poor’s 500.

On top of it all, Google faces major chal-

lenges from Yahoo and Microsoft as those companies work to improve their Internet search technology.

You’d think all this might make people think twice before hitting the “buy” button, but mundane issues like valuation,

governance and professional management tend to get lost in the stampede when there’s money to be made flipping tech stocks. Remember all those amateur day traders who lost a fortune when the tech bubble burst in 2000? They’ve been in rehab for a few years, but they just fell off the wagon.

The question is: what did we learn from the meltdown in technology stocks that gave us the worst bear market in recent history?

Google provides the answer: meltdown? What meltdown?

steve.maich@macleans.rogers.com