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At the final bell, our Mr. Hopeful bought 100 shares at $210.35—a record. We think he should have bought the whole company.
The great Google challenge. Wanna bet?
LAST NIGHT’S DRAMA on Wall Street did not begin until after the market officially closed. It was then that Google, the great search engine-cum-advertising company, announced record 2004 revenues and profits. To be sure, Google’s results were spectacular indeed. The company announced 4th quarter re-cord profits of $204 million—a sizeable multiple of the $27 million achieved the year earlier--while sales doubled to $1.03 billion from $512.2 million. Marvelous stuff, indeed. In after market trading, the party started in ear-nest. Several big fish came in with orders of 30’000 shares and more which, naturally, attracted a shoal of minnows, nibbling away in lots of 100 and 200 shares. The action was all on the ask price—a feed-ing frenzy, in fact. At 6:29:48 pm Eastern Standard Time, the last trade was recorded. Some anonymous Greater Fool—unable to contain his enthusiasm any longer--lifted the final offer, shelling out $21’035 for 100 shares at $210.35—the final close. An impressive day by all measures. With a sparkling 147% gain since its IPO in Au-gust, Google’s new market value now stands at $55.23 billion (fully diluted), and was quoted at just over $5 billion more than it was when the regular session ended, a few short hours before. What a magnificent and effortless way to make money, no? And, no, since you ask, we didn’t get in on the action since it was past dinner time here in quiet little Switzerland. We do wonder whether this Mr. Hopeful would have put in a bid for the whole company, were he able to afford it. After all, if he believes the small fraction he owns is worth the price he paid, why not aim for the big leagues and buy the whole shebang?
And why not? The investment world fully ex-pects Google to double its sales and profits every year, from here to eternity. So, assuming it does, we reckon that sometime around late 2010 our man will recoup the whole of his original invest-ment and still own the company, simply by pock-eting the cumulative annual net income his new acquisition had earned him. Not bad for a five year return! By then, of course, Google’s revenues would be approaching $210 billion. This is equal to what General Electric and Berkshire-Hathaway—together do today. Moreover, it will be around four times the US advertising industry’s combined 2004 total sales and more than 10 times the reve-nues of today’s market leader, WPP Group. In-deed, why not? We also reckon that by then, Google will be turning out around $35 billion a year in after-tax profits. Yes, this is the same as Exxon-Mobil and Wal-Mart Stores combined earn today. Think what you may, such comparisons are quite plausible to our Mr. Hopeful. Indeed, 27 of the 28 analysts on Wall Street who follow Google would cheer at the thought. That is why, had he a mere $55 billion in spare change, we bet that he’d want to own all of Google for himself. It’s just too good an opportunity to pass up. We’d like to make a small bet with Mr. Hopeful and the other many professional investors who bought Google at 210 today. Well, not a bet, per-haps, more of a friendly intellectual challenge. Since we missed the action on Wall Street, it’s only fair that we get a similar –if, sadly, notional - $55-plus billion to go on our own investment spending spree. We’ll accumulate our own portfo-lio at the closing prices of 2 February and, in so do-ing, our challenge would be to invest—just like our Mr. Hopeful—the entire bundle in one go. From there, we, too, will sit on our front porch and wait for the annual profits to roll in from our holdings over the next five years or so. But what shall we buy? We see that Merrill Lynch sells for roughly the same price as Google - $55 billion, give or take – but, no, investment banking is too spicy for our taste, so we pass. For $54 billion we could buy that other techno-marvel, eBay, but, no, we shall also pass on the opportunity to take a small cut out of every one of those wannabe entrepreneurs, trying to make it by selling each other cheap junk and unwanted gifts. We are partly tempted to just sink it all in Gil-lette – again trading at $50-some billion, but we suppose that Mr. Buffett may not be willing to part with his stake in this global consumer giant. We think about the combination of owning Apple Computer and General Motors. The bill would be about right and—you never know—a 2005 model Cadillac with a built-in iPod may be just the thing to turn the ailing car company around. But, again, we pass. For the sake of our American audience, we’ve chosen names of which its members are most likely to have heard. Had we stayed closer to home, we could have pondered buying all of Credit Suisse plus Lindt & Spruengli—the famed choco-latier. Money and chocolate would have been the per-fect combination and—the Lord knows—the big, old bank desperately needs some new blood at the top, but, maybe next time. In truth, we can play such games with a whole host of such combinations, for - even in today’s in-flationary world of unpricked asset bubbles and wild overvaluations - $50 some-odd billion is still mere change, but, at last, being in Switzerland, we always succumb to our innate sense of caution. So, instead of buying whatever is in vogue, we shall spend our hypothetical fortune on things we more or less understand. Having performed the relevant calculations and made our careful selections, here is the final list of what we’ll take against Mr. Hopeful’s big bet on Google:
Our $55.23 billion bought all of:
* Archer-Daniels-Midland Co 15.7
* Bunge Corp. 6.3
* Fresh del Monte Produce 1.8
* Imperial Oil Co. 12.3
* Meridian Gold Co. 1.8
* Sherritt International 1.1
* XTO Energy 9.5 Yara International 3.8
* 206.1 tonnes gold bullion 2.8
Mr. Hopeful’s $55.23 billion bought all of:
* Google Inc. (Class A) $55.23
You notice that we also bought over 200 metric tons of gold – about one month’s total world sup-ply. Frankly, we could not come up with some-thing worthwhile for as little as $2.8 billion and thought we might as well keep the difference liq-uid. Of course, this is more gold than even the
Bank of England may have in its vaults - but, what the heck? Those observant and geographically aware will also notice that we have gone to business with Señor Fidel Castro, via our putative holding in Sherritt. We are thus the largest oil producer in Cuba, its largest electricity generator, and we also have a nice little collection of seaside resorts in Veradero beach. This can be where we do our bit for free commerce and peace with all nations. George Washington would have been proud. Now, since we own the entire companies, it may make things easier from a tax perspective if we were to combine them all into a single holding company. Since we spent all our money, there’s nothing left to pay the consultants to come up with a catchy name for us. So, we’ll take something as prosaic as the “Deden Group”. Or, on second thoughts, perhaps it ought to be ‘Grupo Deden’ for we are keen on resource-rich Latin America and, for credibility’s sake, the name should reflect a lit-tle of that rumba rhythm. Now, we admit that Mr. Hopeful owns the greatest company since AT&T at its glory—perhaps the best since Global Crossing. For our part, old-fashioned as we are, we don’t understand how search engines make money, so we stick with things we do understand. This means that all we have chosen to buy is boring old “things” - bricks and mortars, fields and mines, factories and machinery. As a result, we now own the largest agricul-tural firm in the world; several million acres of ar-able land; the largest fertilizer production facilities in the world; around 3-plus million ounces of gold in the ground (to go with all that bullion already safely in the vault); some very serious oil, gas, nickel, cobalt, and coal reserves; a huge chunk of Canada’s oil sands; several refineries; thousands of petrol stations; hundreds of factories; several ports; and dozens of ships and aircraft. A comprehensive inventory would take quite a while to run through, but, mindful of our readers’ patience, we choose to merely summarize it. Our depreciated fixed assets alone are on our books for something like $25 billion. In reality, their replacement cost may be three times as much, so, should things somehow go awry, we do have a good deal of hard substance to set against our pur-chase price. (Mr. Hopeful has a website address, a few sizeable server racks, and a dictionary entry.) In the interest of even further abbreviation and staying within the financial parameters of this great shopping spree, let’s summarize the starting point of our challenge. What do we have (again, in $ billions)
What $55 billion bought Grupo Deden vs. Hopeful Holding:
* Consolidated sales 94.84 vs. 3.19
* Last year’s net profits 3.72 vs. 0.40
* Last year’s cash flow 7.36 vs. 0.98
* Fixed Assets 25.06 vs. 0.38
* Debt on the books 9.93 vs. None
* Sareholders’ Equity 26.04 vs. 2.93
We admit total ignorance of the modern in-vestment metrics and their rationalizations of value. Clearly, being over the age of forty, we must labor under the handicap of being irretrievably set in our ways. So, for the benefit of the odd Certified Financial Analyst who still bothers to dust-off his textbooks and who calculates with the old-style arithmetic, the following ratios represent a grand summary of our deal:
‘Old economy’ valuation ratios. Grupo Deden vs. Hopeful Holding:
* Acquisition price 55.2 vs. 55.2 $bln
* Price to Earnings 14.9 vs. 138.1
* Price to Sales 0.6 vs. 17.3
* Price to cash flow 7.5 vs. 56.5
* Price to book 2.1 vs. 18.9
We don’t know who Mr. Hopeful is but we have a certain perverse admiration for his refusal to bow to mere caution and to elbow his way through the frenzy and to get his precious hun-dred shares before the bell rang. No doubt, he spent the rest of the evening tell-ing anyone who would listen what a great investor he was. After all, he did put up some $21’000 of his own (or the bank’s) money. Since Europe was fast asleep by that time of the day, we must assume he was an American. With the territory probably comes a wife (per-haps not the first such to hold the office), a brood of designer-labeled kids, a maxed-out mortgage, two SUVs (complete with monthly notes) and an insignificant IRA of some kind. For Mr. Hopeful, a hundred shares in Google is the great hope of finding the American dream amid his waking nightmare of debt-financed life-style choices. Owning the whole of Google would be a material paradise, no less.
But, remember that now he owns the entire company, something funny will happen—it will no longer be quoted. No bids. He will be the only shareholder, so there will be no way to check the ticker for bids against which to measure how well his investment is faring. Rather, he will have to sit and wait while the business itself generates his money – rather than relying on the greater hunger of a multitude of other Mr. Hopefuls to deliver him a quick gain in the market. As he does, our man will hopefully come to understand that money is not necessarily wealth. And as to price, that it is only a yardstick to meas-ure value—not value in itself. So, Mr. Hopeful – whoever you are – will you take our little wager and resist the temptation to sell Google at the next higher bid today? Instead, hold it “for the long run”. If you do, we are as certain as we can be that, by holding this wonderful company, your net worth will never see a day in the plus column. On the other hand, we are pretty confident ours will never see a minus one. Ok. Here’s the deal. After Google reports its figures in October 2010 (assuming there still is a Google by then!), we will each tally up the worth of our respective stakes. Should you win, we will fly you and your ex-tended family to our beloved Zürich, first class. We will put you up at the Baur au Lac Hotel and treat you to fabulous Swiss fare at the imperious Kronenhalle. Should we win, on the other hand, well, you then come here on your own nickel but we still pay for the dinner. Oh, if you don’t know where any of these places are, just look them up on Google... or MSN, AskJeeves, or Yahoo, or… —AD |
