Google Insiders Take the Money and Stay

The McGraw-Hill Companies Inc.:

Execs at the Web search giant have reaped eye-popping sums from selling some stock holdings. But they're not bailing outjust getting rich

Should Google's less well-heeled shareholders worry that top brass are taking some money off the table? Insider trading experts are sanguine. "There's nothing nefarious going on" with these insiders selling, says Ben Silverman, director of research for InsiderScore.com, which tracks the stock sales of top executives.

"The company went public, they've done fantastic, and now a bunch of them are getting rich."

In fact, the company's top executives have earned more from their stock sales than the company has made in profits since it went public in August, 2004. They raked in $5.5 billion by unloading stock during the past 12 months, according to the data-monitoring service InsiderScore.com. From businesses such as online advertising, the company produced $1.47 billion net income during the entire year of 2005. During the year ended 2004 they made $399 million.

SLOW HAND.

Google CEO Eric Schmidt racked up $670.3 million by shedding around 2.1 million shares during the past 18 months, according to InsiderScore.com. While Schmidt made some bucks this way, he's sacrificed only a fraction of the 12.45 million total shares that he reported holding in an Apr. 12 Securities and Exchange Commission filing. He still has 11.3% of the total voting power as of Mar. 17, 2006. [Schmidt, Page, and Brin all hold Class B shares, which carry 10 votes per share rather than the single vote per share that Class A stock carries.]

The co-founders have also held on to the bulk of their shares. Page reported in April that he owned 32.08 million Google shares and held 28.8% of the voting power. He has cashed in about 6.8 million shares during the past 18 months, for a total of $2.1 billion. Google's other paterfamilias, Brin, who held 31.96 million shares and 28.7% of the voting power in April, has sold about 6.4 million shares during the past 18 months, for $2 billion.

The Google trio may be near the end of their stock sales. In an SEC filing on Nov. 19, 2004, the executives explained their plans for selling stock, saying they wanted to spread their stock trades over an extended period of time and give investors advance notice of the sales so they wouldn't raise concerns. They also gave targets for how much stock they expected to sell under the plans.

Schmidt had said he would sell approximately 2.2 million shares, so he is now 95% of the way to that benchmark. Page and Brin said they would sell 7.2 million shares each, putting them at 94% and 89%, respectively, of their stated targets. A Google spokesman could not provide information immediately on whether the three executives plan to stop their sales or institute new trading programs after they reach the benchmarks of the 2004 SEC filing.

STILL A BUY.

As promised in that SEC document, Google's top executives have parceled out their shares steadily, instead of dumping them wholesale and hurting the stock's value. Insider sellers have unloaded Google stock almost every month since the company went public two years ago with shares offered at $85 apiece. The amounts they sold increased from a low of $135.76 million in November, 2004, to a high of $686.07 million in May, according to research firm Thomson Financial in Stamford, Conn. Since the IPO, shares have risen fivefold, to $424.56. "I can't fault these people for selling," says Mark A. LoPresti, a senior quantitative analyst at Thomson Financial.

How Page and Brin are spending their money is attracting plenty of attention. Even the normally restrained Wall Street Journal gushed last fall about Page and Brin's purchase of a Boeing 767, describing it as larger than the two Boeing 757s that serve as flagships for Microsoft (MSFT) co-founder Paul Allen's fleet of aircraft. Page and Brin are also involved in philanthropic giving. They've set up a philanthropic arm at their company, called Google.org, which funds everything from entrepreneurship programs in Ghana to literacy projects in India.

Despite the sales by insiders, Wall Street analysts think investors should keep buying. Out of 38 analysts tracked by the San Francisco investment research firm StarMine, 31 have Google's stock rated either "Buy" or "Strong Buy." Nobody says "Strong Sell."

LUSH LIFESTYLE.

"Insider selling is never a positive, but it could be neutral," says Piper Jaffray's analyst Safa Rashtchy. "Overall [Google's insider selling] doesn't sound alarming." Rashtchy says the company's stock price will rocket to $600 during the next 12 months. He admires Google's aggressiveness in going after new markets with products such as Google Checkout, an online payment system that debuted on June 29.

Rashtchy says investors will pay 50 times Google's earnings as long as the company continues creating cash and growing every year. He's expecting Google to produce a "substantial" $3.5 billion after-tax profit in 2007.

Laura Martin, senior media analyst at Soleil-Fulcrum Research in New York, says Google's current share price embeds the assumption of 21% earnings before interest taxes, depreciation, and amortization growth every year for the next decade. "No advertising-driven business since 1947 has achieved anything faster than 17% per year," she says.

She's one of the few analysts to rate Google at "hold," but even she isn't worried about the company's insider trading. "It is typical of Internet senior managers to sell shares under pre-established plans," she says. She thinks it's an appropriate way for Google executives to fund their lifestyles.

Given the company's astonishingly large market cap, selling the tiniest portion of Google shares will result in eye-popping numbers. Even after recently tapping that piggy bank, insiders continue to have significant stakes in the company and much riding on its continued success. After all, Page and Brin might each want their own jetliner one day.