Dual-class stock = enlightened dictatorship

I like Marc Andreessen a lot. I think he writes some deep and thoughtful posts at his blog, and as more than one person has pointed out, his analysis of the Microsoft-Yahoo brouhaha has been second to none (except maybe Kara Swisher at All Things Digital). And his latest post on dual-class shares is likewise deep and thoughtful — and I also happen to think it is wrong. I must admit, he is such a persuasive bugger that he almost had me nodding along in agreement there for awhile. But I wrote about some of the reasons why I think he’s wrong the last time he brought the idea up, and I stand by that post.

Try this: Read through Marc’s excellent argument, but whenever he says “dual-class shares,” insert the word “dictatorship” in there instead, and I think you will see what I mean. In effect, Marc is arguing that dual-class shares are a fantastic way of running a technology company — provided nothing goes wrong. That is, if the ones with the voting control are also majority shareholders, and if they have a long-term vision for the company, and if shareholders go in with their eyes open, and if the founders don’t suddenly become… well, dictators.

I now believe that dual-class stock structures are a great idea for a technology company that is in the process of going public, under the following conditions:

* The key leaders of the company — typically the founders — who will own the controlling Class B shares, are also major economic shareholders in the company. They own a significant portion of the company and are therefore highly incented to maximize the value of the company over time.

* The key leaders of the company who own the controlling Class B shares have a long-term goal of building a major franchise, and the commitment required to execute against that goal.

* The controlling Class B shareholders have a commitment to treat Class A shareholders fairly and equally in all respects other than voting power.

* All public shareholders understand what they are getting into up front — no bait and switch.

This seems to me to be the equivalent of the old saying about how Mussolini was bad, but at least he “made the trains run on time.” In other words, on the whole the complete centralization of power in the hands of a dictator was for the best. I would never compare Larry Page or Sergey Brin — or even Jerry Yang and David Filo — to an evil dictator, but my point is that just as a benevolent dictatorship is seen by some as the best political structure for a country (“best” meaning the most efficient), so dual-class shares might seem like the best share structure for a company, right up until something goes wrong.

As I said in my previous post, dual-class shares are an attempt to get around Darwin’s Law as it applies to the marketplace. Multiple-voting shares protect incompetent, complacent or simply unsuccessful companies that should be taken over and either remade or dismantled. If your company is agile enough and creative enough, it shouldn’t need them. And if you don’t want to bow to the whims of the marketplace, then there’s a simple solution that Marc ignores: Don’t go public.

Why did we pick the name Yahoo again?

As expected by just about everyone, Yahoo released fairly lacklustre numbers late Tuesday — and also used a word that you should try never to use in an earnings outlook: “headwinds.” As Rob Hof notes at BusinessWeek, this is code for “results are going to suck until further notice.” The stock was off about 10 per cent in after-hours trading, and that took it down near $20, or 40 per cent lower than it was three months ago.

Henry “I used to be a famous Wall Street analyst” Blodget has a pretty good rundown of the numbers at Silicon Alley Insider (although I must admit that every time he does that kind of thing I wonder whether he isn’t getting a little close to the line, given his settlement with the SEC). The fact is that Yahoo is cutting 1,000 people — as was widely rumoured last week — and its future guidance was so-so at best.

Share of the search market flat or falling, profit margins lower, new deals with cable companies bringing in lower revenue — not a pretty picture. but Yahoo still has high hopes, according to Sue Decker. Unfortunately, Yahoo shareholders have had some pretty high hopes as well, and about all they have to show for them so far is a share price that has been sliding down the slippery slope for the past year.

Apple knocks it out of the park

Like many people, I expected Apple’s results for the latest quarter to be good — after all, sales of the iPhone seem to be humming along (despite some early skepticism about the market’s response), and Mac sales also seem to keep climbing. But I must admit that I didn’t expect the company to blow the doors off. Profit up 67 per cent, revenue up almost 30 per cent — for a company with annual sales of almost $25-billion, that is an incredible performance. Analysts were expecting 85 cents a share in profit and Apple made $1.01. The company’s share price has more than doubled since the beginning of the year, but I would hazard a guess that it is going to go up some more.

Google = lean, mean, cash machine

Even when you’re expecting a pretty amazing financial performance — as just about everyone (including me) was from Google’s latest quarter — it’s still something to see a company that is firing on pretty well all cylinders and has a commanding share of the market it operates in. I expect that watching Microsoft in its early years was very similar, as it came to dominate the desktop operating-system business and turned into a gigantic cash-manufacturing machine.

I know that there are many things that could happen to derail the Google train: online advertising could go soft, click fraud could become a bigger issue, etc., etc. It’s not as though bigger companies haven’t suddenly found themselves on the wrong side of a curve before. It could happen to Google.

At the moment, however, the company is at the top of its game — it’s in a dominant position in a rapidly-growing market, and despite having $15-billion or so in revenue, it is still growing at double-digit rates every quarter. That means it could very soon be a $30-billion company, and then people who thought $500 a share was too expensive are probably going to feel very foolish.

Google — still not in the top 20

VentureBeat has a post up about the stock-market value of Google’s shares, and how it briefly eclipsed that of Cisco — Silicon Valley’s biggest and traditionally most highly valued company. Of course, earlier this year Cisco was worth substantially more, and could be again. But it’s still fun to play the market-capitalization game. So Google is at $160-billion (give or take a hundred million or so). That’s a lot, right? Not really.

mcduck.gifIn fact, the company isn’t even in the top 20 most highly-valued companies in North America — not even on the front page of the leaderboard, as a golfer would say. According to Yahoo’s stock screener tool (Google either doesn’t have one or I couldn’t find it), Google is still well behind Exxon Mobil ($461-billion), GE ($378-billion) and Citigroup ($260-billion). It’s still almost 50 per cent smaller than Microsoft ($283-billion) and is considerably smaller than Wal-Mart ($204-billion). However, it is well ahead of IBM ($151-billion), Intel ($123-billion) and Hewlett-Packard ($121-billion). Not bad for only having been a public company for about two years, I guess.