As strange as it may seem, today, August 19th 2014, marks the ten year anniversary of Google (GOOG; GOOGL)’s IPO. I say strange because I am sure that many, like me, have to be reminded occasionally just how young the company is. The seemingly ubiquitous nature of the search provider creates the impression that they have been around as a public company forever rather than just 10 years.
A decade is a short time in the history of a company dominant in its field, but even in that relatively short time, Google has taught us a few things. On the anniversary of the IPO and in keeping with the “musings” part of this columns title, here are three random lessons from the short life of Google.
1. Investment Bankers Don’t Like Innovation: That IPO in 2004 was notable for a couple of reasons, but most of all for the way it was priced. The company decided to launch with a “Dutch auction”, where essentially investors, rather than investment bankers, set the price. This was in keeping with the radical “Do no evil” spirit of the company, but many argue that the experiment was a failure. Having originally hoped to sell close to 26 million shares at $108-$135, Google ended up selling 19.6 million at $85.
Obviously, that was not a roaring success, but in the context of a bad market for tech at that time, and worries about an SEC inquiry into how shares were awarded to employees among other bad publicity in the run up to the launch, it wasn't too bad. If the purpose of an IPO is to set up a company for future growth, though, rather than just to enrich the early investors and founders, subsequent events make it hard to call the IPO a failure. With one or two exceptions, however, Dutch auctions never caught on. Bankers, it seems, don’t like the investing public setting the price by way of simple supply and demand. They prefer to keep control, and to keep the big fat fees associated with that control.
2. Just Because You Don’t Understand Something Doesn’t Mean It Can’t Work: It seems hard to imagine now, but in 2004 there were plenty of people who didn't see a bright future for Google. Many didn’t understand search engines at all, and certainly couldn’t see how an upstart like Google could a) beat established rivals and b) monetize success even if it came. 20/20 hindsight is a wonderful thing, but it is hard not to smile when you look back on articles such as this editorial, from the usually reliable Economist.
Mostly, it deals with the problems surrounding the IPO such as the sluggish market mentioned above and bad publicity surrounding, of all things, a Playboy interview, but it is the last section, under the sub-heading “Losing Its Lead” that looks somewhat ridiculous from here. It details the huge advantages Yahoo (YHOO) and Microsoft (MSFT) had over Google and has a very negative tone for the stock. Obviously, that didn’t work out too well, and that should be borne in mind by those who dismiss other innovative firms and ideas. Remember it when you consider Bitcoin, 3D printing or the next development in social media. Not every innovation is successful, but your ability to grasp the concept without some research has no bearing on that success or failure.
3. We Now Know The Value Of A Shareholder Voting Right: When, earlier this year, Google went through with a 2:1 stock split that had originally been announced in 2012, it created some confusion. Many people, such as my son, held Google shares as part of a small portfolio acquired as gifts or small investments over the years. He was, and I’m sure many others were, unaware of the impending split, and called me in a panic when he saw the stock had “lost” 50 percent. I explained to him at the time that it made no difference, as he now had two shares for each one he had previously.
That was simple enough, but the answer to the next question, “Why did they do it, then?” was a little more complex. For each old Class A share, holders received one new Class A share (GOOGL) and one Class C share (GOOG). The new Class C shares had no voting rights, enabling the company to issue them in future for takeovers and stock based compensation without diluting the control of the founders, Larry Page and Sergey Brin. From a stock nerd’s perspective this has had an interesting consequence. We are now easily able to discern the value of a voting right in Google. The Class A shares trade about $10, or 1.7 percent higher than the class C shares; thus the right to vote on the future of Google, even as part of a built in and preserved minority, is worth $10.
In the light of all this, what should not be lost is the unbelievable success story that Google has been over the last 10 years. The company’s name is now a verb in its own right and the stock has gained 600 percent. Google Glass, driverless car research, and other projects show that the company is still a dynamic force for innovation with a bright future. I, for one, would like to wish Google a very happy 10th birthday, with many more to come.