There's been plenty of controversy over the years about the insistence of Google's (Nasdaq: GOOG ) execs on splitting the company's shares into two voting classes, with the Class B shares of co-founders Sergey Brin and Larry Page, and CEO Eric Schmidt, having ten times the voting power of the Class A shares that the rest of us can buy via the market. This arrangement guarantees that Brin, Page, and Schmidt can collectively shoot down any shareholder proposal in spite of having a combined ownership stake that's well below 50%.
Judging by how Brin, Page, and Schmidt run their company, I can see why they'd want such a safeguard in place against potential shareholder wrath.
Defenders of the dual voting-class structure might argue that Berkshire Hathaway's (NYSE: BRK-B ) shares have long worked under similar rules, with the net effect of giving Warren Buffett and Charlie Munger the same kind of ability to overrule shareholder wishes. But Buffett and Munger also have a very hard-earned reputation of making the growth of shareholder value their first priority. Google, on the other hand, is not only a participant in the value-destroying practice of repricing stock options grants, it's arguably one of its worst offenders, having repriced options for over 6 million shares last year by $191 or more. You don't need to be one of the math whizzes working on Google's search algorithms to know that's a lot of money.
Can you see Buffett signing off on the repricing of millions of Berkshire stock options by triple-digit dollar amounts, assuming he was even a fan of using stock options for compensation purposes? Me neither.
Google's leadership has produced plenty of value for shareholders since their company first went public. And it's quite possible that they'll produce more of it in the coming years. But all the same, investors should realize that they're putting their money into a company that, from the looks of things, also has other priorities in mind.
A different view of success
Investors definitely have a lot of reasons to like Google: While well off their 2007 highs, the company's shares are still up more than 80% over the last twelve months, and more than 580% from their IPO price of $85. Minor fluctuations aside, the company continues to throttle Yahoo! (Nasdaq: YHOO ) and Microsoft (Nasdaq: MSFT ) in its bread-and-butter search and affiliate advertising businesses, and as long as that's the case, it should remain a cash cow. But all the same, it's worth asking whether Google's actions often give shareholder interests a backseat to management's quirky vision of the kind of company that their brainchild should be.
And by such behavior, I'm not merely thinking about Google's headline-grabbing threat to exit the Chinese market rather than continue censoring its search results on Google.cn. In fact, I don't think it's worth dwelling on that move in particular. At least in the Chinese censorship case, Google's decision, while potentially damaging to shareholders (though less so to Baidu (Nasdaq: BIDU ) ), is based on an honest attempt to stick to its stated moral principles. Whereas in many of the company's other moves, shareholder interests are harmed simply because Google's executives appear to define "success" in a different way than what you'd expect for a company that has to answer to public investors.
In a nutshell, Google's leadership seems to think of "success" not just in terms of building shareholder value by growing earnings and cash flow per share, but also in terms of being able to create cool new products and services, and to remake the way that markets and even industries work. For sure, these goals aren't always incompatible: Google Maps and Gmail turned the online mapping and email markets on their heads, and they also seem to be generating meaningful advertising revenues for the company. And while YouTube has burned up quite a lot of cash, it looks like that site's finally on the verge of turning profitable -- if only after its huge losses raised some alarm bells.
Questionable business decisions
But how about Google Books? Between the cost of scanning and indexing its growing library of books and magazines, and the $125 million settlement that it reached with authors and publishers in 2008, I'll go out on a limb and assume that the modest amounts of advertising delivered by Google Books hasn't come close to recouping its costs.
Then there's the hundreds of millions that Google has committed to investing in alternative energy research -- not exactly a core business for the company. Going in hand with these investments is the creation of Google Energy, and its plans to gain access to and sell enough power from renewable sources to make Google as a whole "carbon-neutral." A laudable goal, but let's keep in mind here that Google's data center infrastructure, with its hundreds of thousands of servers, is one of the biggest IT power hogs on the entire planet. Unless the government proves willing to subsidize the company's efforts on a massive scale, expect this operation to be another cash sinkhole.
Let's also not forget Google's recent plans to enter the ISP business by launching an "experimental" fiber network that will provide 1 Gbps Internet access to as many as 500,000 homes. As AT&T (NYSE: T ) and Verizon (NYSE: VZ ) can attest, digging up residential streets to install fiber can get pretty expensive. Google claims that its network will be a test bed for running new, bandwidth-intensive applications. But this looks like a ridiculously costly way of achieving that goal. More plausible to me is the idea that this is a desperate attempt by Google's leadership to spur the adoption of faster broadband connections in the U.S., even if the chances of success are hardly in Google's favor.
All of these initiatives give the impression of a company that's so confident that it can keep shareholders happy via the cash generated by its search advertising business that it can get away with putting some shareholder value at risk via actions that "feel good" to do. And as long as Brin, Page, and Schmidt keep signing off on such feel-good actions, Google is a riskier investment than you might otherwise consider it to be.
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