Daring to be different

By Gérard Bérubé

Google had hoped to do things differently. The founders of the popular Internet search engine said their unconventional IPO approach would set them apart from so-called traditional enterprises. Yet this attitude would prove to be presumptuous when it launched an initial offering of restricted shares, a class of stock consistently criticized and condemned.

Even if the company had wanted to do things differently, by focusing its highly mediated IPO on two classes of common shares, Google cofounders Larry Page and Sergey Brin ended up staging a smoke and mirror show. Of course they made a big deal about not wanting to be ruled by short-term imperatives and not issuing quarterly forecasts, thus rejecting the widespread concern about immediate returns. They refused to smooth or "manipulate" their results to meet market expectations — unlike the blatant attempts of Coca-Cola and McDonald's. To set itself apart even more, Google's IPO was preceded by an auction to determine the best issue price in advance. Claiming it wanted to avoid the classic move of issuing shares to friends and early investors and prevent speculation in the first days after the IPO, management hoped to obtain a fair market value that would immediately set the highest price. This didn't sit well with early investors who wanted to take advantage of the IPO to pocket their gains and unload their stock.
So much for originality and virtue. In fact, the founders' intention to use multiple voting shares to consolidate control was widely denounced, as was their use of a move favoured by communications and media companies — that of separating capital from ownership by creating two classes of shares, each with a different number of voting rights.

A throwback to the 1980s, these two classes of stock are regarded with growing hostility on US and European capital markets, a view that could certainly harm the company's future financing efforts. When this type of debate resurfaces, opponents of separating ownership and control don't hesitate to bring up the case of Gildan and AEterna Laboratories. Éric Dupont, founder of AEterna, made news in May 2003 by announcing that he had independently and voluntarily decided to renounce his majority control of the Quebec corporation by converting his multiple voting shares into subordinate voting shares. As a result, his voting rights dropped from 57% to 12%. In February 2004, the founding brothers of Gildan agreed to carry out a similar conversion with no compensation and saw their voting rights fall from 67% to 20%.

Opponents of the Google approach remember when Paul Tellier, CEO of Bombardier, spoke out in favour of eliminating the dual-share structure, an outburst that caused a rift between him and Laurent Beaudoin, head of the family that controls the corporation despite its minority interest. This also brings to mind the potential for abuse that is illustrated by the case of Conrad Black who, with a 32% interest entitling him to almost three-quarters of the voting rights, clashed with Hollinger International Inc.'s board of directors as he struggled to hold on to the reins of the company.

This type of formula does have its uses however. It has often meant the difference between an undercapitalized and fragile company and one that has a better financial structure and growth potential. Company founders reluctant to give up control but aware of the limitations of indebtedness see it as a way to strengthen their hold on their organization and promote expansion. The use of restricted shares has allowed companies such as Quebecor, Jean Coutu, Couche-Tard and Bombardier to see the light of day. These organizations not only became pillars of the local economy, they were also able to penetrate foreign markets.

However, once an organization reaches a certain size or phase in its development and its financing efforts outgrow the local capital market, pressure to abandon such a structure could intensify. Yet, there is always the natural reflex to want to keep a company in the family, to impose a successor irrespective of merit or competency, or even to stack a board of directors in favour of the founders, simply by exercising a right to vote that is not tied to actual ownership.

With 2003's revenue close to US$1 billion and net income of US$105 million, Google could have undoubtedly risen to the challenge of daring to be different. Especially since the two founders had no cause to worry about being ousted given Yahoo's and Microsoft's intention to develop their own Internet search technology.

Gérard Bérubé is editor of the Économie et finance section of Le Devoir in Montreal