Monthly Archives: May 2014

Following a surprisingly well written Business Insider story on Google, I ended up watching this TED Talk from Larry Page:

Google's Larry Page at TED talk

Larry Page (credit: TED)

First, it’s nice to notice that a nerd with even less charisma than yours truly — no mean feat — can get that far. We can also dispatch that what he’s doing is obviously interesting, and the question whether it’ll end up being unadulterated good or a case of hell being paved with good intentions will likely remain open for a long time. I would like to comment specifically of how it impacts the investment case for Google, the listed company, and more precisely what it tells us about property rights, which are so often misunderstood.

From his talk, background and biography it’s clear that he’s on a mission to change the world. Operationally Google is really an applied science research foundation, trying to find novel solutions to hard problems with direct application in human life.

The search engine, or any profitable business they might stumble upon during the process of research, or otherwise, are like an endowment — providing funds for further research, supporting the foundation in perpetuity or until it runs out of fund trying. This is very admirable as such, and good for them, and possibly society at large, that they can do that. I’d happily do the same if offered the opportunity. It’s also refreshing to see a US corporation not fixated on quarterly “shareholder value”, often in such a myopic way that actual value gets vaporised in the process of trying to hard to maximise it directly (John Kay’s Obliquity idea, again).

In that context though, it doesn’t make sense for Google to ever return funds to holders of the equity, as it would impair Google’s primary raison d’ĂȘtre and goals as a science foundation.

Prudently, the Google share capital is structured in such a way, more often encountered in Italy or Sweden, that a small number of magic closely held shares have overweight voting rights, to ensure that Larry Page and the other founders control the company, and not the flimsy public shareholders. Holders of the lower ranking common shares have effectively no vote and cannot remove or change Google management.

Such shares a are a funny product: they are not classical equity with an interest in the company’s governance (where holders of the paper can use their vote to bargain for a share of the company’s successes, or sell them to someone who will) nor notes with predefined returns like in the case of bonds. Perpetual zero coupon bonds, maybe.

The only case where the company’s principals need to care about the market (second hand) value of such shares is when they either want to raise new money in this way (issue new such shares) or sell any existing such shares they issued to themselves in the past (exit or some form). Indeed apart from regulatory reasons that encourage large US corporations to be listed, the main reason Google is a listed company seems to be that the listing provided a way for the early venture cap investors to exit.

In that context, valuation becomes a really funny game. Google B shares being unlikely to pay out, a discounted cash flow model, of whatever kind, does not apply. The shares are more like a museum membership scheme, designed to promote but not own the institution, in exchange of a feel good factor and possibly status for the member. It is thus remarkable that many people still look at Google shares as if they were full voting shares of a for-profit company. Google’s profits, EPS or financial metrics matter very little yet the market still reacts to these numbers, if with its usual capriciousness. One could argue that there is a chance that successors of the current leadership, some decades from now, may turn the foundation into an ordinary for-profit common stock company and that the current price represents the discounted probability of that happening, times the financial valuation at the conversion point. My guess though is that It should be much cheaper than it is now, if one follows that view. Indeed the “risk” they do research that may not turn into profitable products (even if it may change the world) seems pretty substantial.

This though does not lead us to any obvious exploitable effect, other than making Google uninvestable for outsiders as a credit product. If the shares’ price freely follows the mood of a motley crew of people who don’t understand the structure, and supporters of scientific research, it’s a tough game to make predictions of how it might evolve.