Insiders feel the undulations of a stock well watched, and they feel....time to take profits

Date:   9/7/2005 7:34:40 PM ( 19 y ago)

Google Insiders Get Paid

The financial press loves stories about insider stock activity. First, a surge in selling can be a sign that companies see, at best, an overvalued stock or, at worst, trouble ahead. Second, people read stories that connect big names with big numbers, and let's face it, that's about as close to fame and fortune as some of us are ever going to get.

The fact that 13 Google (GOOG:Nasdaq - news - research - Cramer's Take) insiders have, since the company's IPO, sold off nearly $3 billion of shares without much notice is evidence that the former factor isn't in play. Google insiders are disposing of their stock responsibly, using the automatic sales method intended to avoid cashing in ahead of bad news.

Then there are the numbers themselves, which add up to a great mass of Googly Moogly.

According to Thomson Financial, Google's insiders sold 14.6 million shares worth $2.97 billion since its August 2004 IPO through Aug. 31, 2005, at an average of roughly $204 a share. For a year's work, $3 billion isn't bad at all. But as Google CEO Eric Schmidt likes to say, the company is only getting started.

So, let's say the automatic selling, which has averaged 1.4 million shares a month over the past seven months, holds that pace. And let's say Google's stock continues to trade around $300 for the next year. In that case, Google insiders would be selling another $5 billion in the coming year through its orderly insider selling.

If you're among the people who have only five digits to your annual income, it might help to have some context for that $3 billion. It's only 1/27th of Google's current market cap. But it's 1.5 times the amount Barry Diller paid for search rival Ask Jeeves and nearly as much as the total revenue at Yahoo! (YHOO:Nasdaq - news - research - Cramer's Take) last year.


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Outside the tech world, the number seems even bigger -- $3 billion is greater than the economies of Greenland, Samoa and Monaco combined. It's a half-billion more than the U.S. government budgeted for humanitarian aid. It's almost five times what the American Red Cross brought in through public support last year.

In other words, it's a lot of money for most people.

But the big numbers are not just the result of the surge in Google's stock price. Insiders there have been unusually active in selling. In the past six months alone, they've sold 5.6% of the total shares held by insiders. That ratio is lower among its peers: Microsoft (MSFT:Nasdaq - news - research - Cramer's Take) insiders have sold 5.3%, Yahoo 4.6%, eBay (EBAY:Nasdaq - news - research - Cramer's Take) sold 0.6% and Amazon.com (AMZN:Nasdaq - news - research - Cramer's Take) insiders shed 0.7%.

And that is exactly how the system is set up to work. Find a brilliant idea, or make someone else's brilliant idea more useful, and these are the kinds of rewards to be reaped. So no one is begrudging co-founder Sergey Brin his $858 million or co-founder Larry Page his $855 million, or Schmidt and the other two insiders who have sold upward of $250 million in stock.

But for investors holding Google shares, this may be the most relevant bit of context: In just one year, Google's insiders made nearly twice as much from stock sales as the company raised in its initial public offering. The 14.5 million shares sold are nearly three-fourths as much as the 19.6 million offered last summer. That's adding a lot of supply of the stock.

And more shares are headed toward the market. Google has filed to sell another 14.2 million shares to fatten its cash coffers. This time, it's quietly abandoned the Dutch auction process and dropped WR Hambrecht, the boutique firm specializing in auction IPOs, from the underwriters named on the prospectus.

Instead, the new shares will reportedly go to a few dozen powerful institutional investors. Currently, 59% of Google's shares are held by insiders and another 38% are held by institutional investors. After the secondary offering, individual investors will control an even thinner sliver of the company's shares.

That in itself isn't a bad thing. But it does illustrate Google's quiet retreat from the high ideals of standing up for the individual investor. During its IPO, Google bragged that the offering would democratize the underwriting process, just as its search engine democratized the Internet. A year on, the underwriting process is the same oligarchy it stood up to a year ago.

In their quest for fortune, Google's managers have abandoned the ideals of democracy for the profits of pragmatism. It's working very well, but it raises a question: If Google is so quick to drop field-leveling auctions from its underwriting process, how long will it take before it considers stripping the democratic algorithms in its search engine?








 

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