The Googlian Knot

gretavo's picture

This is something I wrote before Google went public... a comment on the recent open thread at 911B about Google censorship and their "do no evil" motto prompted me to repost...

Thursday, August 12, 2004

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The Googlian Knot

OK, so the smell of the Google scandal may not have reached everyone. I've therefore resolved to dissect the damn thing, to really reveal the malodorous rot, if only because it lays bare the cynicism built into capitalism and the pathetic cowardice of experts on economics in failing to expose this, just as they let Enron and the Tech Bubble proceed apace, saving their recriminations for when the looters had disappeared...

So... Google is currently a privately owned company, consisting of roughly 240 million shares of stock which, when 20 million were secretly (and thus in violation of SEC regulations) used to pay about 1000 companies and consultants, were valued by the company at about $3 each. So by their own measure, the company is worth about $720 million. In other words Google's not worthless, obviously, in fact the company made a whopping $100 million or so in the last year, by selling about $1.4 billion in online ad sales (so their profits were about 7% of sales, the rest of that revenue, or $1.3 billion, went somewhere, to run the company, pay the CEO, etc...) and their prospects are not bleak, just challenging.

Who owns it now? Different people and companies own different amounts. Both of the founders own an amount in the 10's of millions, Yahoo owns a few million, each of the venture capital firms which got Google off the ground as a company with $2 million each own 25 million shares, and of course, 1000 other companies and consultants own on average 20,000 shares each. Then of course, the corporation itself owns a certain number of shares.

Google's much ballyhooed IPO*, or initial public offering, will be offering 20 million shares from the company's stock, but will also include about 20 million more being sold by some of the companies and individuals who own their own shares.

Here's where the magic is about to happen...

Remember, Google is a company worth less than a billion dollars--let's say it's made up of 240 million three-dollar bills. 20 million of these bills will be sold to the public at $108-$135 a piece. Let's round it down to $100 for simplicity. On the side, another 20 million shares will be sold at roughly the same price by insiders. So one day after it's IPO, here's what the world will look like (roughly):

The public will have given Google $2 billion for 20 million shares of stock. They will also have given a handful of insiders another $ 2 billion for their Swiss bank accounts.

The public will own 40 million shares for which they paid $ 4 billion. $2 billion was pocketed by insiders, but the other $2 billion is now held by the company as cash, in addition to the rest of their assets, in effect tripling their actual value as a company (assets minus liabilities) from the day before to about $3 billion. You might be wondering why the public paid $4 billion to be owners of one-sixth of a company worth $ 3 billion... well, let's step back for a second.... The actual value of the company has nothing to do with its value in real life, but instead its value on paper, i.e. the stock price multiplied by the number of shares, in our case, about $24 billion. Wow! Did you see that? We just turned a pile of 240 million three-dollar bills into a company worth more than General Motors!

It gets better though, for the insiders. Remember, they only sold 20 million of the company's 240 million shares. They still own the rest! They managed to turn their sub $1 billion company into a $24 billion behemoth! At scheduled intervals, they will sell off their shares so long as there are buyers, until they've turned all their three-dollar bills into gold. Pretty soon, people will catch on and the share price will float, or shoot, down to a more realistic price level determined by the market. If annual profits remain at around $100 million, then the average historical price to earnings ratio (20) would suggest a fair market value of about $2 billion.

*The Google IPO was the brainchild of the following two venture capital firms:

http://www.kpcb.com/team/
http://www.sequoiacap.com/partner_matrix.asp

I researched this article with Google. :)