On Friday, Google announced — through a filing with the Securities and Exchange Commission — that executive chairman Eric Schmidt has scheduled the selling off $1.45 billion Google shares — about 42% of his stake in the company. Or from another perspective, Schmidt will dump nearly $2.51 billion in today’s shares value.
Schmidt’s strategy has naturally raised several questions. For example, why now? Does he think there's a big market correction coming soon? (Let’s recall the Dow Jones hitting 14,000 for the first time in five years on February 1). But whether Schmidt believes the stock markets have hit a (temporary) ceiling is not the most relevant question. The main concern today is whether other executives will follow suit and thus, ignite the ancient self-fulfilling prophecy, where behaviors and expectations alter actions and therefore forces itself to come true.
Personally, I wouldn’t worry too much, because we ought to look at other fundamentals of the economy. First and foremost, Google’s largest plunge took place not long ago. Last October, Google suffered an important correction itself when its third quarter results were accidentally released. Up until then, the giant tech industry had experienced a meteoric rise. Many had believed that such exponential increase was indeed a bubble and so the fall was bound to happen. On October 19, Google’s bubble finally burst, and the world stock markets plunged with it.
But today the scenario is quite different. The fall of last October was due to negative numbers from the company. Today, Google faces a much healthier situation and according to the company’s statement, Schmidt’s move responds to an “individual asset diversification and liquidity” strategy. This will allow Schmidt to spread trades out over a period of one year to reduce the market impact. In other words, he will not dump everything at once.
The key of this press release was that Schmidt will sell 3.2 million shares of class A common stock through a stock trading plan that extends for a long period of time, which is specifically intended to minimize the risks of another bust like the one suffered 4 months ago. Schmidt owns around 7.6 million shares of class A and class B common stock, which represents 2.3% of Google’s outstanding stock and around 8.2% of the voting power.
What is more, Schmidt has already promised to keep working with founders Larry Page and Sergey Brin until 2024. And even after the selling, Schmidt will have shares worth about $4 billion. When we put these numbers in perspective, this huge dump of billions represents hardly a change for someone who already has twice as much from the very corporation he promised to stay on with until 2024.
Finally, some have conjectured that he may pursue a political career. Others have said he might host his own TV show. Perhaps Schmidt is indeed preparing for a new life beyond the Googleplex. Be that as it may, he seems to be doing so in a very smooth and orderly fashion.
All an all, I’d say this move shouldn’t bring much noise, but I’m probably doing a very orthodox and cold calculation, which might probably prove naïve this morning. Why? It is expected that Google will make a well-studied statement to minimize the risks from such a significant stock auction. Google has got to lead the market today and wisely offset the likelihood of speculative attacks and volatility in its share prices. However, the “portfolio diversification” statement sounds natural and believable.
That being said, there is one major fact remaining: Schmidt is seeking profit maximization (the same way any other rational investor would). Meaning: he’s trying to get the best deal possible. And to him the moment has come. So, wouldn’t this be the most important variable to consider? I’m going out on a limb here and suggest that Schmidt may feel we are up for a market correction pretty soon.
But whether he believes there is a market correction, it will not be self-fulfilled unless other executives panic and start dumping their shares as well. And it doesn't seem that this will be the case, because Google has already adjusted to the correction of last October.
All there is left is to wait to see how the market reacts, as we will definitely see some interesting action. There is a strong smell in the air suggesting a market correction, and some agents will definitely draw upon this to speculate. They will surely cause some noise. But I’m sure these fluctuations will prove to be a short-term trend. Americans have bigger problems to face; for example, the likelihood of a dollar correction. That should be America’s top concern today. This is a real threat.