October 10, 2006
Google's "Interlocking Relationships"
Posted by Christine Hurt

Gordon's post below asks the ultimate question:  Why do this?  The "this" of course is acquire YouTube, the unspoken "who" is Google.  Reports this week have been criticial of this alliance, remarking on the future legal problems inherent in YouTube's business plan and the heavy reliance on advertisers for revenue.  Here's a cynical view of "why":

Google has 11 board members.  One of those board members is Michael Moritz, a big partner at Sequoia Capital.  Sequoia Capital owns approximately 30% of YouTube and stands to turn an $11 million investment into a $495 million take-home.  This NYT article explains how Google may be emulating a Japanese business custom of "interlocking relationships" (keiretsu) where "friends sell to friends."  Of course, in the U.S., friends may sell to friends, but at some point we have to consider whether these interlocking relationships turn an acquisition into a related-party transaction.

Here, probably not.  Although the three Google board members (Schmidt, Brin, and Page) may feel obligated to Sequoia Partners for past investments, a court would probably not look to a historical economic relationship to find dependence.  Two of the board members are presidents of Stanford and Princeton.  Although both schools' endowments invest in venture capital, unless the schools are current investors in Sequoia Partners (and I can't find any evidence of that), then they will be independent as well. 

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