No-one should be surprised that the internet visionaries of Google are capital markets’ dinosaurs. While on the one hand they are offering to break the investment banks’ grip on the IPO process when the internet search engine comes to market (an act that may or may not be as progressive as it is billed), on the other they have come up with a shareholding structure that exhibits all the worst features of the most backward models still found in some emerging markets.

Witness the situation in Brazil, long complained about but still unreformed, whereby owners can control companies with relatively small amounts of capital by having different classes of shares, ones with voting rights and others without. This ugly system reared its head once again in March when Brazilian beer company AmBev merged with Interbrew to form the world’s largest brewer. On announcement of the deal, AmBev’s ordinary shares (with voting rights) rose 8% and its preferred shares (with no voting rights) fell 15%, reflecting market concerns about the treatment of minorities.

Dressed up as a device to help the firm’s management take long-term decisions, the two-tier structure flies in the face of a basic tenet of capitalism: inefficient firms get taken over and the management gets fired. Wonderful as Google founders Larry Page and Sergey Brin have been in seizing an opportunity and exploiting it, there is no guarantee that they are as able in running a public company (which requires very different talents) or that they have the organisational abilities to take the company to the next stage of development.

With this structure, if they get it wrong, investors have little recourse in forcing them to get it right or get out.

Google’s filing to the Securities and Exchange Commission is crammed with pretentious platitudes: “We believe strongly that in the long term, we will 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”; “Google is not a conventional company. We do not intend to become one”. These would be better served up in their marketing campaign than in financial documents.

With this amount of fizz, it’s obvious that the stock is going to appeal to a lot of first-time and young investors. While opting for a Dutch auction as a supposed way of giving small investors a fairer deal, thereby cutting out the middle man and the often cosy role of the investment banks, Google will very probably wind up scoring an own goal for the very team it claims to support.

The auction is bound to push the price up and small investors will find themselves with a stock that goes down rather than up when it hits the open market. In other words, Google will succeed in raising more money for the company – leaving too much for investors is a criticism of the traditional process – but at the expense of small investors. One estimate has them shelling out for a price/earnings ratio of 100, ensuring they learn about investing the hard way.

Institutional investors may still find a way of cutting a deal. The terms of the filing still allow Google to set a final price below the auction clearing price if it wishes. On top of this there are technical questions about operating an auction process of this scale.

It all seems fraught with difficulties and downside. No wonder one corporate financier said: “Google’s management team is excellent in innovating within their own area of expertise but the concern is that they want to innovate in someone else’s area.”

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