The Hindu Business Line : A tough act to follow

Google's offer document, in the run-up to its IPO, is refreshingly different but not many players would be able to do something on similar lines, perhaps.

INDIA'S claims to being a putative economic power will remain just that — a mere claim — as long as we have also-ran companies engaged in me-too businesses and run by cookie-cutter people who seek to substitute performance with pomposity and posturing.

The US, in sharp contrast, has made a transition from a frontier society to an economic giant in a few generations by placing a premium on individualism and originality.

The offer documents put out by Indian companies, when placed alongside the Google prospectus, illustrate vividly this fundamental difference in the two societies.

Indian companies tapping the capital market circulate offer documents that bear an eerie resemblance to one another in the turgidity and incomprehensibility of their prose. Without exception, they leave the reader wondering whether the companies involved should not stick to the generation of hot air and the manufacture of fluff... preferably with owned funds.

Google, on the other hand, revels in telling it like it is, in a welcome deviation from the dictum, "If you can't blind them with your brilliance, baffle them." In an ideal world, the Securities and Exchange Board of India (SEBI), no dab itself at obfuscation, would have made Google's Form S-1 Registration Statement filed with the Securities and Exchange Commission (SEC) mandatory reading for all market intermediaries in India. But, alas, as the Left allies of the Congress at the Centre have been pointing out, it's far from an ideal world... .

Various media organisations have reported and commented upon the fact that Google's filing pegs the exact value of its initial public offering at $2,718,281,828 dollars — the mathematical constant `e' or Euler's number which is used as the base for natural logarithms.

But this display of sardonic in-house humour is not the only distinguishing feature of the document. It's delightfully different in other ways too.

Take, for instance, the `Letters from the Founders: An owner's manual for Google's shareholders' the introduction to which goes like this:

"Google is not a conventional company. We do not intend to become one. Throughout Google's evolution as a privately held company, we have managed Google differently. We have also emphasised an atmosphere of creativity and challenge, which has helped us provide unbiased, accurate and free access to information for those who rely on us around the world."

"Now the time has come for the company to move to public ownership. This change will bring important benefits for our employees, for our present and future shareholders, for our customers, and most of all for Google users. But the standard structure of public ownership may jeopardise the independence and focused objectivity that have been most important in Google's past success and that we consider most fundamental for its future. Therefore, we have designed a corporate structure that will protect Google's ability to innovate and retain its most distinctive characteristics. We are confident that, in the long run, this will bring Google and its shareholders, old and new, the greatest economic returns. We want to clearly explain our plans and the reasoning and values behind them. We are delighted you are considering an investment in Google and are reading this letter."

"Sergey and I intend to write you a letter like this one every year in our annual report. We'll take turns writing the letter so you'll hear directly from each of us. We ask that you read this letter in conjunction with the rest of this prospectus."

Some more excerpts from the prospectus:

Serving End Users

"Sergey and I founded Google because we believed we could provide a great service to the world — instantly delivering relevant information on any topic. Serving our end users is at the heart of what we do and remains our number one priority.

"Our goal is to develop services that improve the lives of as many people as possible — to do things that matter. We make our services as widely available as we can by supporting over 97 languages and by providing most services for free. Advertising is our principal source of revenue, and the ads we provide are relevant and useful rather than intrusive and annoying. We strive to provide users with great commercial information."

"We are proud of the products we have built, and we hope that those we create in the future will have an even greater positive impact on the world."

Long Term Focus

"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. In our opinion, outside pressures too often tempt companies to sacrifice long-term opportunities to meet quarterly market expectations. Sometimes this pressure has caused companies to manipulate financial results in order to `make their quarter.' In Warren Buffett's words, "We won't `smooth' quarterly or annual results: If earnings figures are lumpy when they reach headquarters, they will be lumpy when they reach you." (Footnote: Much of this was inspired by Warren Buffett's essays in his annual reports and his `An Owner's Manual' to Berkshire Hathaway shareholders.)"

"If opportunities arise that might cause us to sacrifice short term results but are in the best long term interest of our shareholders, we will take those opportunities.

We will have the fortitude to do this. We would request that our shareholders take the long term view."

"Many companies are under pressure to keep their earnings in line with analysts' forecasts. Therefore, they often accept smaller, but predictable, earnings rather than larger and more unpredictable returns. Sergey and I feel this is harmful, and we intend to steer in the opposite direction."

"Google has had adequate cash to fund our business and has generated additional cash through operations. This gives us the flexibility to weather costs, benefit from opportunities and optimise our long-term earnings.

For example, in our ads system we make many improvements that affect revenue in both directions. These are in areas like end user relevance and satisfaction, advertiser satisfaction, partner needs and targeting technology. We release improvements immediately rather than delaying them, even though delay might give `smoother' financial results. You have our commitment to execute quickly to achieve long term value rather than making the quarters more predictable."

"We will make decisions on the business fundamentals, not accounting considerations, and always with the long term welfare of our company and shareholders in mind."

"Although we may discuss long term trends in our business, we do not plan to give earnings guidance in the traditional sense. We are not able to predict our business within a narrow range for each quarter. We recognise that our duty is to advance our shareholders' interests, and we believe that artificially creating short term target numbers serves our shareholders poorly.

We would prefer not to be asked to make such predictions, and if asked we will respectfully decline.

A management team distracted by a series of short term targets is as pointless as a dieter stepping on a scale every half hour."

Risk vs Reward in the long run

"Our business environment changes rapidly and needs long term investment. We will not hesitate to place major bets on promising new opportunities."

"We will not shy away from high-risk, high-reward projects because of short term earnings pressure. Some of our past bets have gone extraordinarily well, and others have not. Because we recognise the pursuit of such projects as the key to our long-term success, we will continue to seek them out. For example, we would fund projects that have a 10 per cent chance of earning a billion dollars over the long term. Do not be surprised if we place smaller bets in areas that seem very speculative or even strange. As the ratio of reward to risk increases, we will accept projects further outside our normal areas, especially when the initial investment is small."

"We encourage our employees, in addition to their regular projects, to spend 20 per cent of their time working on what they think will most benefit Google. This empowers them to be more creative and innovative. Many of our significant advances have happened in this manner. For example, AdSense for content and Google News were both prototyped in `20 per cent time.' Most risky projects fizzle, often teaching us something. Others succeed and become attractive businesses."

"We may have quarter-to-quarter volatility as we realise losses on some new projects and gains on others. If we accept this, we can all maximise value in the long term. Even though we are excited about risky projects, we expect to devote the vast majority of our resources to our main businesses, especially since most people naturally gravitate toward incremental improvements."

Executive Roles

"We run Google as a triumvirate. Sergey and I have worked closely together for the last eight years, five at Google. Eric, our CEO, joined Google three years ago. The three of us run the company collaboratively with Sergey and me as Presidents. The structure is unconventional, but we have worked successfully in this way."

"To facilitate timely decisions, Eric, Sergey and I meet daily to update each other on the business and to focus our collaborative thinking on the most important and immediate issues. Decisions are often made by one of us, with the others being briefed later. This works because we have tremendous trust and respect for each other and we generally think alike. Because of our intense long term working relationship, we can often predict differences of opinion among the three of us. We know that when we disagree, the correct decision is far from obvious. For important decisions, we discuss the issue with the larger team. Eric, Sergey and I run the company without any significant internal conflict, but with healthy debate. As different topics come up, we often delegate decision-making responsibility to one of us... .."

Don't Be Evil

"Don't be evil. We believe strongly that in the long term, we will be better served — as shareholders and in all other ways — by a company that does good things for the world even if we forgo some short term gains. This is an important aspect of our culture and is broadly shared within the company."

"Google users trust our systems to help them with important decisions: medical, financial and many others. Our search results are the best we know how to produce. They are unbiased and objective, and we do not accept payment for them or for inclusion or more frequent updating. We also display advertising, which we work hard to make relevant, and we label it clearly. This is similar to a newspaper, where the advertisements are clear and the articles are not influenced by the advertisers' payments.

We believe it is important for everyone to have access to the best information and research, not only to the information people pay for you to see."

The letter is signed by the Google founders, Larry Page and Sergey Brin.

Of course, not all approve of the tone and content of the filing.

Thus, David Wells of Financial Times, in a story headlined "Google put forth an IPO estimate and put itself in hot water," (May 8), observes: "Google's preliminary prospectus for its planned initial public offering says the most widely used Internet search engine could raise $2,718,281,828."

"But investors should not take this number seriously. It is not likely to be the actual amount the company raises."

"The figure was offered solely for the purpose of computing the amount of the registration fee Google paid, in accordance with the Securities Act of 1933."

"Why so specific? Someone at Google tried to be cute: 2.718281828 is an expression of the value of the natural log e. According to the Math Forum website, 'e is a real number constant that appears in some kinds of mathematics problems. Examples of such problems are those involving growth or decay, the statistical bell curve, the shape of a hanging cable, some problems of probability, some counting problems and even the study of the distribution of prime numbers.'"

"This inside joke has made for good copy, readers of Dan Brown's The Da Vinci Code might find Google's choice of numbers fun or even funny. But while Google is famous for being unorthodox, an IPO prospectus might not be the place for such behaviour. Google's founders have made it clear that going public was a hard choice, but they need to take the admittedly flawed process seriously. If the IPO is a success, the natural e choice will be infamous.

But if the process fails, lawyers might deem it evidence that the company never took it serious."

"If that seems silly, remember: The US is a litigious place, and lawyers are watching this IPO like hawks to find flaws."

"IPO pricing and allocation, as Wall Street's investment banks have come to know through lawsuits and millions in fines, is not something to take lightly... ."

Yeah...yeah.

But if any lawyer tangles with Google on this one, you'll be able to hear the laughter clear up to the North Pole.

eworld@thehindu.co.in

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