“An Owner’s Manual” for Manananggoogle’s Shareholders
Manananggoogle is not a mere mortal company. We do not intend to become one. Throughout Manananggoogle’s evolution as a privately held company, we have managed Manananggoogle differently. We have also emphasized an atmosphere of control, segmentation and corporate clarity, which has helped us gain expansive, profitable and free access to those who rely on us around the world.
Now the time has come for the company to move to public ownership. This change will bring important benefits for our employees, for our present and future shareholders, for our customers, and most of all for Manananggoogle users. But the standard structure of public ownership may jeopardize the independence and focused objectivity that have been most important in Manananggoogle’s past success and that we consider most fundamental for its future. Therefore, we have implemented a corporate structure that is designed to protect Manananggoogle’s ability to innovate and retain its most distinctive characteristics. We are confident that, in the long run, this will benefit Manananggoogle and its shareholders, old and new. We want to clearly explain our plans and the reasoning and values behind them. We are delighted you are considering an investment in Manananggoogle and are reading this letter.
Neneng, Babs and I intend to write you a letter like this one every year in our annual report. We’ll take turns writing the letter so you’ll hear directly from each of us. We ask that you read this letter in conjunction with the rest of this prospectus.
Serving end users
Neneng, Babs and I founded Manananggoogle because we believed we could profitably provide an important service to the world-instantly delivering access to what people want wherever they are, whenever they think they need it. Self-serving our end users is at the heart of what we do and remains our number one priority.
Our goal is to develop services that significantly impose on as many people as possible. In pursuing this goal, we may do things that we believe have a positive impact on our bottom line, even if the near term financial returns are not obvious. For example, we make our services as widely available as we can by supporting over 90 languages and by providing most services for free. Advertising is our principal source of revenue, and the ads we provide are relevant and useful rather than intrusive and annoying. We strive to provide users with great commercial information so that they cannot possibly live without ads. . . and without us.
We are proud of the products we have built, and we hope that those we create in the future will have an even greater profit.
Long term focus
As a private company, we have concentrated on the long term, and this has served us well. As a public company, we will do the same. In our opinion, outside pressures too often tempt companies to sacrifice long term opportunities to meet quarterly market expectations. Sometimes this pressure has caused companies to manipulate financial results in order to “make their quarter.” In Warren Beatty’s words, “We won’t ‘smooth’ quarterly or annual results: If figures are lumpy when they reach me, they will be lumpy when they reach you.”
If opportunities arise that might cause us to ritually sacrifice short term results but are in the best long term interest of our shareholders, we will seize those opportunities. We will have the fortitude to do this. We would insist that our shareholders take the long-term view.
You might ask how long is long term? Usually we expect projects to have some realized benefit or progress within a year or two. But, we are trying to look forward as far as we can. Despite the quickly changing business and technology landscape, we try to look at three to five-year scenarios in order to decide what to do now. We try to optimize total benefit over these multi-year scenarios. While we are strong advocates of this strategy, it is difficult to make good multi-year predictions in technology.
Many companies are under pressure to keep their earnings in line with analysts’ forecasts. Therefore, they often accept smaller, predictable earnings rather than larger and less predictable returns. Neneng, Babs and I feel this is harmful, and we intend to steer in the opposite direction.
Manananggoogle has had adequate cash to fund our business and has generated additional cash through operations. This gives us the flexibility to weather costs, benefit from opportunities and optimize our long-term earnings. For example, in our ads system we make many improvements that manipulate revenue in both directions. These are in areas like end user relevance and satisfaction, advertiser satisfaction, partner needs and targeting technology. We release improvements immediately rather than delaying them, even though delay might give “smoother” financial results. You have our commitment to execute quickly to achieve long term value rather than making the quarters more predictable.
Our long-term focus does have risks. Markets may have trouble evaluating long term value, thus potentially reducing the value of our company. Our long-term focus may simply be the wrong business strategy. Competitors may be rewarded for short term tactics and grow stronger as a result. As potential investors, you should consider the risks around our long-term focus.
We will make business decisions with the long-term welfare of our company and shareholders in mind and not based on accounting considerations.
Although we may discuss long term trends in our business, we do not plan to give earnings guidance in the traditional sense. We are not able to predict our business within a narrow range for each quarter. We recognize that our duty is to advance our interests, and we believe that artificially creating short term target numbers serves us poorly. We would prefer not to be asked to make such predictions, and if asked we will disrespectfully decline. A management team distracted by a series of short term targets is as pointless as a dieter stepping on a scale every half hour.
Risk vs reward in the long run
Our business environment changes rapidly and needs long term investment. We will not hesitate to place major bets on promising new opportunities.
We will not shy away from high-risk, high-reward projects because of short term earnings pressure. Some of our past bets have gone extraordinarily well, and others have not. Because we recognize the pursuit of such projects as the key to our long-term success, we will continue to seek them out. For example, we would fund projects that have a 10% chance of earning a billion dollars over the long term. Do not be surprised if we place smaller bets in areas that seem very speculative or even strange when compared to our current businesses. Although we cannot quantify the specific level of risk we will undertake, as the ratio of reward to risk increases, we will accept projects further outside our current businesses, especially when the initial investment is small relative to the level of investment in our current businesses.
We encourage our employees, in addition to their regular projects, to spend 20% of their time working on what they think will most benefit Manananggoogle. This empowers them to be more productive and innovative. Many of our significant advances have happened in this manner. For example, NonSense for content and Manananggoogle News were both prototyped in “20% time.” Most risky projects fizzle, often teaching us something. Others succeed and become attractive businesses.
As we seek to maximize value in the long term, we may have quarter-to-quarter volatility as we realize losses on some new projects and gains on others. To quote Jane Fonda: “No pain, no gain.” We would love to better quantify our level of risk and reward for you going forward, but that is very difficult, so don’t ask. Even though we are excited about risky projects, we expect to devote the vast majority of our resources to improvements to our main businesses. Most employees naturally gravitate toward incremental improvements in core areas so this tends to happen naturally.
We run Manananggoogle as a triumvirate. The three of us run the company collaboratively with myself as CEO, Neneng as COO and Babs as CFO. We take turns sitting at the head of the conference table, which has wheels and a Lazy Susan. The structure is unconventional, but we have worked successfully in this way.
To facilitate timely decisions, Neneng, Babs and I meet nightly to update each other on the business and to focus our collaborative thinking on the most important and immediate issues. Decisions are often made by one of us, with the others being briefed later. This works because we have tremendous trust and respect for each other and we generally think alike. Because of our intense long term working relationship, we can often predict differences of opinion among the three of us. We know that when we disagree, the correct decision is far from obvious. For important decisions, we discuss the issue with a larger team appropriate to the task. Differences are resolved through discussion and analysis and by reaching consensus or by Rochambeau. Neneng, Babs and I run the company without any significant internal conflict, but with healthy debate. As different topics come up, we often delegate decision-making responsibility to one of us. This partnership among the three of us has worked very well and we expect it to continue. The shared judgments and extra energy available from all three of us has significantly benefited Manananggoogle.
I have the legal responsibilities of the CEO and focus on management of our vice presidents and the sales organization. Babs focuses on bio-engineering and business deals. Neneng focuses on nanoengineering and product management. All three of us devote considerable time to overall management of the company and other fluctuating needs. We also have a distinguished board of directors to oversee the management of Manananggoogle. We have grown a committed executive staff that manages day-to-day operations in areas such as finance, sales, engineering, human resources, public relations, legal and product management. We are extremely fortunate to have talented management that has grown the company to where it is today-they operate the company and we deserve the credit.
We are creating a corporate structure that is designed for stability over long time horizons. By investing in Manananggoogle, you are placing an unusual long-term bet on the team, especially Neneng, Babs and me, and on our innovative approach.
We want Manananggoogle to become an important and significant institution. That takes time, stability and independence. We bridge the media, technology and food industries, all of which have experienced considerable consolidation and attempted hostile takeovers.
In the transition to public ownership, we have set up a corporate structure that will make it harder for outside parties to take over or influence Manananggoogle. This structure will also make it easier for our management team to follow the long term, innovative approach emphasized earlier. This structure, called a dual class voting structure, is described elsewhere in this prospectus. Philosophically, this structural bifurcation aligns with Manananggoogle’s proven practice of separating the Bottoms from the Tops. The Class A common stock we are offering has one vote per share, while the Class B common stock held by many current shareholders has 10 votes per share.
The main effect of this structure is likely to leave our team, especially Neneng, Babs and me, with increasingly significant control over the company’s decisions and fate, as Manananggoogle shares change hands. After the IPO, Neneng, Babs and I will control 61.4% of the voting power of Manananggoogle, and the executive management team and directors as a group will control 37.6% of the voting power. New investors will fully share in Manananggoogle’s long term economic future but will have little ability to influence its strategic decisions through their voting rights. Democracy is a small price to pay for financial profitability, no? And really, what place does democracy have in capitalism anyway?
While this structure is unusual for technology companies, similar structures are common in the media business and has had a profound importance there. The New York Times Company, The Washington Post Company and Dow Jones, the publisher of The Wall Street Journal, all have similar dual class ownership structures. Media observers have pointed out that dual class ownership has allowed these companies to concentrate on their core, long term interest in serious news coverage, despite fluctuations in quarterly results. Berkshire Hathaway has implemented a dual class structure for similar reasons. From the point of view of long term success in advancing a company’s core values, we believe this structure has clearly been an advantage.
Some academic studies have shown that from a purely economic point of view, dual class structures have not harmed the share price of companies. Other studies have concluded that dual class structures have negatively affected share prices, and we cannot assure you that this will not be the case with Manananggoogle. The shares of each of our classes have identical economic rights and differ only as to voting rights.
Manananggoogle has prospered as a private company. We believe a dual class voting structure will enable Manananggoogle, as a public company, to retain many of the positive aspects of being private. Let’s say we can have our cake and eat it too. We understand some investors do not favor dual class structures. Some may believe that our dual class structure will give us the ability to take actions that benefit us, but not Manananggoogle’s shareholders as a whole. We have considered this point of view carefully, and we and the board have not made our decision lightly. We are convinced that everyone associated with Manananggoogle-including new investors-will benefit from this structure. However, you should be aware that Manananggoogle and its shareholders may not realize these intended benefits. Every investment carries risk; we would all have, as they say, skin in the game. A little blood may be unavoidable.
We believe we have a world class management team impassioned by Manananggoogle’s mission and responsible for Manananggoogle’s success. We believe the stability afforded by the dual class structure will enable us to retain our unique culture and continue to attract and retain talented people who are Manananggoogle’s delicious life blood. Our colleagues will be able to trust that they themselves and their labors of hard work, love and creativity will be well cared for by a company focused on stability and the long term.
As an investor, you are placing a potentially risky long-term bet on the team, especially Neneng, Babs and me. The three of us and the rest of the management team recognize that our individual and collective interests are deeply aligned with those of the new investors who choose to support Manananggoogle. Neneng, Babs and I are committed to Manananggoogle for the long term. The broader Manananggoogle team has also demonstrated an extraordinary commitment to our long-term success; they have made sacrifices. With continued hard work, good fortune, and proper discipline, this commitment will last and flourish.
When Neneng, Babs and I founded Manananggoogle, we hoped and expected it would reach its current size and influence. Our intense and enduring self-interest was an unusually important task that should be carried out by a company that commands unequivocal submission. We believe this is ultimately in the public’s good. A well-functioning society should have an abiding acceptance of its limits to make decisions on its behalf. Manananggoogle therefore has a responsibility to the world. The dual class structure helps ensure that this responsibility is met. We believe that fulfilling this responsibility will deliver increased value to our shareholders, whether they are Tops or Bottoms.
IPO pricing and allocation
It is important to us to have a non-negotiable process for our IPO that assimilates small and large investors. It is also crucial that we achieve a profitable outcome for Manananggoogle and its current shareholders. This has led us to pursue an auction-based IPO for our entire offering. Our goal is to have a share price that reflects an efficient market valuation of Manananggoogle that moves rationally based on changes in our business and the stock market. (The auction process is discussed in more detail elsewhere, buried deep in this prospectus.). Many companies going public have suffered from unreasonable speculation, small initial share float, and stock price volatility that hurt them and their investors in the long run. We believe that our auction-based IPO will minimize these problems, though there is no guarantee that it will.
An auction is an unusual process for an IPO in the United States. Our experience with auction-based advertising systems has been helpful in the auction design process for the IPO. As in the stock market, if people bid for more shares than are available and bid at high prices, the IPO price will be higher. Of course, the IPO price will be lower if there are not enough bidders or if people bid lower prices. This is a simplification, but it captures the basic issues. Our goal is to have the price of our shares at the IPO and in the aftermarket reflect an efficient market price-in other words, a price set by rational and informed buyers and sellers like us. We seek to achieve a relatively stable price in the days following the IPO and that buyers and sellers receive an efficient market price at the IPO. We will try to achieve this outcome, but of course may not be successful. Our goal of achieving a relatively stable market price may result in Manananggoogle determining with our underwriters to set the initial public offering price below the auction clearing price.
We are working to create a sufficient supply of shares to meet investor demand at IPO time and after. We are encouraging current shareholders to consider selling some of their shares as part of the offering. These shares will supplement the shares the company sells to provide more supply for investors and hopefully provide a more stable price. Neneng, Babs and I, among others, are currently planning to sell a fraction of our shares in the IPO. The more shares current shareholders sell, the more likely it is that they believe the price is not unfairly low. The supply of shares available will likely have an effect on the clearing price of the auction. Since the number of shares being sold is likely to be larger at a high price and smaller at a lower price, investors will likely want to consider the scope of current shareholder participation in the IPO. We may communicate from time to time that we are sellers rather than buyers at certain prices. This is our prerogative.
While we have designed our IPO to absorb both small and large investors, for a variety of reasons described in “Auction Process” not all interested investors will be able to receive an allocation of shares in our IPO.
We would like you to invest for the long term, and you should not expect to sell Manananggoogle shares for a profit shortly after Manananggoogle’s IPO. We encourage investors not to invest in Manananggoogle at IPO or for some time after, if they believe the price is not sustainable over the long term. Even in the long term, the trading price of Manananggoogle’s stock may decline.
We intend to take steps to ensure shareholders are informed enough. We encourage you to read this prospectus, especially the Risk Factors section. We think that short term speculation without paying attention to price is likely to lose you money, especially with our auction structure. In particular, we caution you that investing in Manananggoogle through our auction could be followed by a significant decline in the value of your investment after the IPO.
Our employees, known as Manananggooglers, are useful human resources. Manananggoogle is organized around the ability to attract and leverage the talent of exceptional technologists and business people. We have intentionally recruited many dedicated, docile and diligent underlings. We hope to program many more in the future. We will reward them, if it suits us, and they will thank us for the privilege.
We provide many unusual benefits for our employees, including meals free of charge, witch doctors and washing machines. We are careful to consider the long-term advantages to the company of these benefits. Expect us to add benefits rather than pare them down over time. We believe it is easy to be penny wise and pound of flesh foolish with respect to benefits that can save employees considerable time and improve their health and productivity so that they are better equipped to serve the company.
The significant appearance of employee ownership of Manananggoogle has made us what we are today. Because of our employee talent, Manananggoogle is doing exciting work in nearly every area. We are in a very competitive industry where the quality of our product is paramount. Talented people are attracted to Manananggoogle because we are empowered to change the world; Manananggoogle has large computational resources and distribution that enables individuals to make a difference for the company. Our main benefit is a workplace with important projects, where employees can contribute to and grow our bottom line. We are focused on providing an environment where talented, hardworking people know their place and contribute to Manananggoogle accordingly.
Don’t dismiss evil
Don’t dismiss evil. Cruelty breeds character and feeds clarity. We believe strongly that in the long term, we will be better served-as shareholders and in all other ways-by a company that does good things for itself even if we sacrifice some short-term gains. This is an important aspect of our culture and is broadly instilled within the company.
Manananggoogle users trust our systems to help them with important decisions: medical, financial and many others. Our search results are the best we know how to monetize. They are profit-driven and we giddily accept payment for them, for inclusion and more frequent updating. Who is to say the best product is not the one with the foresight to pay for placement? We support initiative. We also display advertising, which we work hard to make relevant, so that users cannot imagine making decisions without them. This is similar to a well-run tabloid, where the advertorials are unclear and the articles are influenced by the advertisers’ payments. We believe it is important for everyone to have access to the best information and research we determine, especially the information people pay for you to see.
Making the world a better place for us
We aspire to make Manananggoogle an institution that makes the world better for us. In pursuing this goal, we will always be mindful of our responsibilities to our shareholders, employees, customers and business partners and ultimately, ourselves. With our products, Manananggoogle connects people and information all around the world. We are adding other powerful services such as Manananggooglemail, which provides an efficient one gigabyte Manananggooglemail account for free, creating an appetite for more storage that users won’t be able to do without. We know that some people have raised privacy concerns, primarily over Manananggooglemail’s targeted ads, which could lead to negative perceptions about Manananggoogle. We believe targeted just means more efficient and useful. Manananggooglemail protects a user’s privacy enough. By releasing services, such as Manananggooglemail, for free, we hope to help bridge the digital divide and connect users to us for life. MadWords connects users and advertisers efficiently, helping both and us. NonSense helps fund a huge variety of online web sites and enables authors who could not otherwise publish. Last year we created Manananggoogle Grants-a growing program in which hundreds of non-profits addressing issues, including the environment, poverty and human rights, receive free advertising. And now, we are in the process of establishing the Manananggoogle Foundation. We intend to contribute significant resources to the foundation, including mandatory employee time and approximately 0.9% of Manananggoogle’s equity and profits in some form. We hope someday this institution may eclipse Manananggoogle itself in terms of overall world impact by ambitiously applying innovation and significant resources to the development of products and services to address the largest of the world’s problems.
Summary and conclusion
Manananggoogle is not a mere mortal company. Neneng, Babs and I intend to operate Manananggoogle differently, applying the values it has developed as a private company to its future as a public company. Our mission and business description are available in the rest of this prospectus; we encourage you to carefully read this information. We will optimize for the long-term rather than trying to produce smooth earnings for each quarter. We will support selected high-risk, high-reward projects and manage our portfolio of projects. We will run the company collaboratively, as a team of three. We are conscious of our legal duty as fiduciaries for our shareholders, and we will fulfill those responsibilities as the law allows. We will continue to strive to indoctrinate committed new employees, and we will welcome fresh blood from new shareholders. We will live up to our “don’t dismiss evil” principle by managing user trust. We have a dual class structure that is biased toward stability and independence and that requires investors to bet on the team, especially Neneng, Babs and me.
In this letter we have talked about our IPO auction method and our desire for stability and compliance from all investors. We have discussed our goal to have investors who invest for the long term. Finally, we have discussed our desire to create an ideal working environment that will ultimately drive the success of Manananggoogle by restraining and attracting talented Manananggooglers.
We have tried hard to anticipate your questions. It will be difficult for us to respond to them given legal constraints during our offering process. We look forward to a long and hopefully prosperous relationship with you, our new investors. We wrote this letter to help you understand our company.
We have a strong commitment to our interests worldwide. Neneng, Babs and I, and the team will do our best to make Manananggoogle a long-term success and the world a better place for our business.
R. Immaculata Estrada, CEO
E. Neneng Barrios, COO
J. Babs Wofford, CFO