The search engine doesn't really do investor days, but so far investors seem to be fine with just an outline of its long term bets
‘Google is not a conventional company. We do not intend to become one.’ Those were the very first words founding partners Larry Page and Sergey Brin visited upon their public shareholders in their 2004 registration statement. But lest investors become too squeamish about this idiosyncratic confession, thsey were also reassured: ‘As a private company we have concentrated on the long term, and this has served us well. As a public company, we will do the same.’
This idea isn’t exactly original; throughout the letter, Page and Brin boldly assert that their IR program is based on Warren Buffett’s famously folksy investors’ letter, his cautious long-term approach and his lack of specifics about earnings. This raised a fair few eyebrows as Buffett shuns technology companies, and no one was sure how the no-guidance concept would work in this context. It was not clear how a sector that had orchestrated and then crushed investor confidence so recently could ever be positioned as a long-term stable growth prospect.
And yet shareholders seem fine with just an outline of Google’s big long-term bets. The evidence is in the simple fact that, as IR magazine went to press, Google’s stock was priced around $560 per share, up from its IPO price of $85.
There’s a market-wide trend away from earnings guidance. According to NIRI, 51 percent of public companies were guiding in 2007, down from 77 percent in 2003. Yet many of those moving away from specific financial guidance like earnings per share are still giving some hint of future performance in forecasts of annual revenue, cash flow and/or other measures. Google doesn’t even go that far, so other IROs are waiting to see the net effect of its approach.
Even friendly comments about Google’s long-term positioning and its appropriation of the Buffett model note how airy the investor communications from the search engine company seem in comparison with Berkshire Hathaway’s.
For instance, one analyst says both Buffett and the Google founders share a mutual belief in the long-term fundamentals, ‘but while Buffett invests in firms with good reputations that have solid growth potential, Page and Brin invest in talented people whose ideas have good growth potential.’ And while Buffett has targeted conservative, solid growth prospects, Google has developed a riskier, yet maybe more rewarding mandate for ‘taking on big problems and delivering big solutions,’ as Scott Kessler, a senior equity analyst at Standard & Poor’s, describes it.
Fundamentally different
Both Maria Shim, who currently directs the company’s IR program, and Lise Buyers, who was responsible for Google’s IR during the IPO, underline a deep personal belief on the part of the founders and CEO Eric Schmidt in the long-term focus of the company. Shim emphasizes that ‘it’s in the founders’ letter’, pointing out that the approach is part and parcel of the founders’ determination to build a company that was true to its mission.
Buyers stresses the effect of cultural and necessary differences on the way an internet company has to approach investor concerns. She notes that these anomalies may not only be in the way Page and Brin approach IR, but can arise from the fundamental paradigm-change that internet companies, especially Google, face.
‘Before moving to California, I worked in investment banking and followed technology companies, though mostly ones that produced hardware and peripherals,’ says Buyers, who is now running Class V Group, a firm advising companies on public market strategy. ‘When I began to follow internet companies, I realized they were fundamentally different, in that they will change in a very basic way how we do much of the stuff we do in life.’
This may be true; it is certainly the Google point of view. On the firm’s recent analyst day, it was pointed out that the internet’s potential is so overwhelming that just one sector – in this case, mapping – had more potential for growth than the original PC market of 20 years ago.
Google’s approach has not gone unquestioned. Analysts noted that early in 2006, the inwardly focused company suddenly experienced several IR hiccups. There were comments that information was not being given as smoothly as it might be to markets. Since then, observers say, Google has been notably more attentive to its investor communications and more available for investor conferences. In October the company hosted its first analyst day in over two years. Attended by over 250 analysts and investors, it was well received.
Caveat emptor
Without the hard data they are used to from other companies, investors are left parsing Google’s mission statements since its 2004 IPO, written by Page and Brin. The tone of the original manual for Google shareholders included with the firm’s SEC registration statement is sincere, almost overly so. It proudly asserts that while markets may be short-sighted, this is a flaw that most assuredly does not worry Google management: ‘Our long-term focus does have risks. Markets have trouble evaluating long-term value, thus potentially reducing the value of our company... As potential investors, you should consider risks around the long-term focus.’
While Buffett claims his success is based on avoiding risk, the Google understudies have a decidedly different approach. ‘Our business environment changes rapidly and needs long-term investment,’ Page writes in the owner’s manual. ‘We will not hesitate to place major bets on promising new opportunities. Many companies often accept smaller predictable earnings rather than larger and less predictable returns. Sergey and I feel this is harmful and we intend to steer in the opposite direction.’
But how long will investors have to walk in the wilderness before Google delivers the promised land? ‘Usually we expect projects to have some realized benefit or progress within a year or two,’ the founders write. ‘But we are trying to look as far forward as we can. Despite the quickly changing business and technology landscape, we try to look at three to five-year scenarios in order to decide what to do now.’
Google has more than delivered on these early promises. Since 2001, it has acquired some 49 companies. Its style in doing this is discreet and self-directed: 37 of these deals, or almost 70 percent, were undisclosed. And the sums being paid for these strategic acquisitions are increasing: Google put $1.65 bn on the table for the internet broadcasting portal YouTube in October 2006 and six months later anted up $3.1 bn for the online ad placement company DoubleClick.
Loyal fans
This brings us to Page and Brin’s last letter, the basis of which is 21 first-person Google customer testimonials. These begin with the thankful words of Peter MacKenzie, giving credit to the internet company for saving his life from cancer. Others witness the benefits of further health-saving applications, the reuniting of star-crossed lovers and easy access to books and entertainment. The theme in the original owner’s manual was that Google’s vision was good for investors. The subtext in the most recent epistle is that Google is good for everyone.
As this letter was being penned, Google was establishing a 12-person lobbying group in Washington, DC. When the company announced in 2007 that it would be bidding in the Federal Communications Commission’s 700 MHz auction, there was a fuller picture of the long-term ambitions of Google’s founders. If it succeeds in acquiring the 12 C block licenses, it could potentially build its own wireless delivery network for another $5 bn.
As one Washington economist pointed out: ‘Its bid for the MHz licenses makes it clear Google is announcing it is prepared to compete on telecom turf with such giants as AT&T. Google wants to keep the open access it already has. But it is already positioning itself aggressively, by acquiring or attempting to acquire its own national network.’
Things to come
While the future is pointing to a G-phone, there is still ample potential for growth in Google’s basic, time-honored business of search. At the last analyst day, Google vice president Vint Cerf noted that while 70 percent of North Americans and 42 percent of Europeans are online, the same status applies to only 21 percent of Latin Americans, 12 percent of Asians and 5 percent of Africans.
Google’s future domestic and international profits largely depend on how the internet pie is carved up between various players. Analysts are asking whether Google can maintain such a big lead over rivals. It is also crucial to know whether YouTube and online video advertising will contribute seriously to revenue as investors consider whether Google’s potential justifies its now $175 bn market cap.
Clearly, Google thinks long term, speaks long term and acts long term. It’s a tack many more established companies would like to try. Wouldn’t they like to remain quiet and just manage the business for the long term? But as Google moves into more competitive spheres like telecoms, populated with some traditional companies, will it be forced to conform to more traditional IR? One thing’s for sure – it will be interesting to watch.
