Google’s Problem: What to do with all that cash?

Gmsv_1

Google has a problem "most companies would love to confront: how to get better returns from investing its cash hoard without being regulated as a mutual fund."

Bloomberg notes that:

Companies whose securities comprise more than 40 percent of their assets can fall under restrictions that govern the mutual fund industry. So Google, which has increased its cash and securities to almost $10 billion since its 2004 initial public offering, asked the U.S. Securities and Exchange Commission late last month for an exemption.

At stake for Mountain View, California-based Google is the chance to move more of its money from low-yielding U.S. government bonds to investment-grade municipal and corporate debt. That would help Google match the investment returns of rivals such as Microsoft Corp., which obtained a similar exemption in 1988.

I had fun on the same subject with a quote picked up by Good Morning Silicon Valley:

"They will probably get the SEC exemption — but if they didn’t, its fascinating to think of what the boys could do with that $10 billion in cash (and securities)," said Barry Ritholtz, chief market strategist for Ritholtz Research. "I strongly doubt we will see a big buyback or a special dividend from them. And there’s only so many jumbo jets anyone really needs. So that makes a major acquisition the next option. Hell, they could buy Tivo, XMSR, half of Amazon.com — and still have a few billion dollars left."

Fun stuff . . .

>

Sources:
The SEC got suspicious after that auditor was crushed by a pallet of hundreds
John Paczkowski
GMSV, August 25, 2006
http://blogs.siliconvalley.com/gmsv/2006/08/you_and_i_wish_.html

Google Seeks Fund Rule Exemption to Increase Investment Returns
Miles Weiss
Bloomberg, Aug. 24 2006
http://tinyurl.com/lsmbp

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What's been said:

Discussions found on the web:
  1. trader75 commented on Aug 26

    Speaking of Amazon, what’s going to happen to them? Paul Kedrosky has speculated they’ll get bought out by Wal-Mart. Seems they need to get bought out by somebody.

    Jeff Bezos has the feel of an altruistic hero–a hero to his customers, not his investors. AMZN keeps burning cash to stay on the cutting edge of commerce while their competitors come in and benefit from the ground Amazon already tilled. They did a bang-up job of making e-commerce respectable and popular, so now the bricks and clicks guys can ramp up their budgets and clean up. Thanks Jeff. And now AMZN looks ready to do something similar with video.

    It’s practically a public service they are doing, taking those arrows in the back yet consistently forgoing first-mover profits. I wonder what the heck Bill Miller sees in them. Anyone know the details of his thesis?

  2. Mike commented on Aug 26

    My opinion is that Bill Miller’s fund is just too big and he had a hard time finding a place to put it. Then he got some kind of internet revelation and parked $4 billion in AMZN. Amazon does need to be bought out to save it’s shareholders from a falling stock, but whoever buys it at today’s market price will be the fool. They still barely make money, and it’s pretty safe to say their “growth” phase (in terms of earnings) never really materialized.

    As for Google, I’ve been a little skeptical of the management from the start… is the Google of a couple years from now going to be a hedge fund that happens to own an internet search business?

  3. cm commented on Aug 26

    Mike: I’d think their business is rather ad placement. Search and the technology underlying both the search and the ad business aer merely vehicles.

  4. BDG123 commented on Aug 26

    Amazon? I just don’t get it. Miller’s fund must be too large because he’s not dumb. By any measure, even the nontraditional methods used to value internet stocks, the company is just so damn expensive. I’m not sure Bezos has a strategy except throw ideas against the wall and see what sticks then develop those which gain acceptance. Btw, that isn’t such a bad business model if the cost of doing so is relatively inexpensive. ie, Google. Given their fixed cost investments, it likely is.

    But, I have to say this download business is going to get super hot at some point. We’ll likely see alot of tampering until WiMax or some other pervasive medium takes hold. This is all fits and starts. Then, you’ll see wireless gadgets capable of downloading compressed movies from libraries just like tunes. The play in all of this is who will emerge as the digital rights management leader, what new compression algorithms will emerge to dominate and the massive infrastructure plays on the back end. ie, Digitization players from both the hardware and software data center spaces. Apple’s chance of dominating this space is about as good as my chance of winning the lottery. Big, big dollars with lots of big, big players. Apple’s got some tap dancing to do to keep them in the middle of every discussion around digital content.

    On a business trip and browse movie selections and download it in seconds to your multifunction handheld. Then wirelessly play it on the big flat screen in your Hyatt hotel room? Want to wirelessly connect to your home entertainment center and watch it on your TV? Want to peruse movies and watch with your 3-D glasses on the train ride home? Or for that matter do the same with IP TV?

    DVDs, tethered connections to portals, CDs, Blockbuster, Neflix, Blue Ray? All dead. Five to seven years before the next major innovation cycle IMO.

    The money to be made is in who will win the ultimate decisions in digital rights management security, massive data center investments in hardware and software digitization, telecom players who will provide managability similar to what is done in the corporate networking world and the compression technology adopted for massive bandwidth data needs.

    Where does Google fit in all of this by generating ad revenue? Hmm….Since the movie studies now get that revenue in the theatres and on DVDs, will they give that to Google? Will Sprint, who is builidng WiMax give it to Google? Or Verizon? Will other content providers give it to Google? Google needs to make some big bets on a future that is very liquid and drive the market. And, they had better learn how to partner aggressively and invest heavily in those partnerships. If they sit back and wait, someone else will take their mantle.

    Web 2.0 is not YouTube. It won’t be here for quite a few years but it ain’t gonna look anything like the web of today. Teh concept of actually logging onto the web as we view it today will likely vanish. And on and on and on.

  5. donna commented on Aug 26

    Or they could start a company to provide computers and wireless access to people with low incomes or in countries that have little technology and expand their market a thousand fold – but unfortunately, the people who actually have money to do these kinds of things seem to lack that kind of vision.

    Wish I had a billion or so to distribute – I think the selfishness of this country and those in it that have money to burn is astounding.

  6. Barry Ritholtz commented on Aug 26

    Remember that Google has a legal and fiduciary obligation to their shareholders to maximize their returns . . .

    Not to most philanthropically spedn the money

  7. BDG123 commented on Aug 26

    Selfish? Well, greed built this country and if you believe in capitalism, greed is good in some form. Obviously, I’m not for much of the shenanigans going on now but what about the philanthropic efforts of American business czars over the last one hundred years? What about Buffett? Gates? Ok, they may have done unscrupulous things to get to where they are but that is capitalism and encouraged to some degree. Obviously, not breaking the law or backdating stock options or Enron or… But what about Gates giving $500 million more for AIDS research? American pharma companies donating drugs globally? The United Way? The fact we fund the vast majority of the United Nations? The giving nature of companies? Feed The Children? Even Wal-mart. The Red Cross? The tsunami relief? Special Olympics? The earthquak devastation in Pakistan? I mean, some stuff is totally screwed up and we don’t do everything right such as Katrina but what the f*ck? Even in that situation American’s across the country opened their homes to total strangers, offered them jobs, dropped everything to volunteer.

    There’s enough to bash in our society and giving isn’t one of them. We are a very giving culture and paradoxically a very greedy culture. Can’t have the yin without the yang. It’s the human condition.

  8. albiegf13 commented on Aug 26

    Go to Google. Type in “failure.” Check the first result.

  9. Norman commented on Aug 26

    Google’s Cash: Its not that the ‘boys’ actually earned the $10B. Their IPO raised $1.7B and in Sept 2005 GOOG had a 14.2m share secondary at $295 for $4.2B. They’ve only added $4B to their coffers on their own over the last +2 years. They have a $150B market cap. What a hype-job.

  10. RW commented on Aug 26

    The google search stunt came up at Dismally ( http://tinyurl.com/lqolf ) where I incorrectly labeled it google stuffing — turns out this is a real but different kind of tactic to improve google rank than the “failure” stunt in question — while another commenter got it right: Google bombing, the tactic of having a bunch of folks put a link, using the same text descriptor, to a particular site; e.g., http://tinyurl.com/lzk2n and http://tinyurl.com/cw6h3

    More on topic, and speculation regarding Google’s political or humanitarian predilections aside, Goog would probably be better off just getting the exemption; at the very least it gives them time to decide what they would really like to do with that cash.

    It’s amazing how much free cash some companies can generate. A number of years back I was delving into Intel Corp fundamentals and was astonished to discover just how large their investment portfolio was — cash, bonds, equities, real estate, etc. — I don’t remember the details but can recall the portfolio was more on the order of a Yale or Harvard than anything else I could think of at the time.

  11. whipsaw commented on Aug 26

    per B:
    “Selfish? Well, greed built this country and if you believe in capitalism, greed is good in some form. Obviously, I’m not for much of the shenanigans going on now but what about the philanthropic efforts of American business czars over the last one hundred years? What about Buffett? Gates? Ok, they may have done unscrupulous things to get to where they are but that is capitalism and encouraged to some degree.”

    Wow you are on a roll tonight B. But I would suggest that capitalism is just a myth that did not scale above the village blacksmith level and what we’ve always had is Corporate Feudalism to one degree or another.

    Buffett and Gates are good guys because they throw some bones to the masses? Al Capone ran soup kitchens during the depression, so what? On balance, the people whom you accuse of good deeds were just polishing their public images and/or stroking their already overblown egos (i.e., Gates wants to be remembered for ‘finding a cure for AIDS’ instead of as the most flagrant software pirate and antitrust scofflaw of the 20th century).

    The resurgent Robber Barony is little more than organized crime with a happy face thanks to the MSM that they control. If they really wanted to help people globally, they would be either busting or buying out the pharma patents that are killing people around the world. That ain’t gonna happen tho.

  12. Royce commented on Aug 27

    The cash should be distributed as dividends, who can then reinvest the proceeds better than Google’s management. That Google isn’t going to be penalized by shareholders for not having a dividend, including big institutions, isn’t rational.

  13. albiegf13 commented on Aug 27

    reality is a bitch… I don’t have the slightest idea of what they should do with that cash. I assume that they will know exactly what to do with it when the time arrives. As an investor in goog I am willing to give them my vote of confidence for the time being. So far so good… However, my concerns at the moment are more on the macro economic than on the micro economic scenario and I am convinced that this cash will serve them well in the future as it relates to value opportunities in the area of aquisitions.

  14. babycondor commented on Aug 27

    donna:
    “or they could start a company to provide computers and wireless access to people with low incomes or in countries that have little technology and expand their market a thousand fold …”

    Your heart is in the right place, but the idea would only make sense if these people also had access to education and jobs. Not much of a “market” there unless they do.

  15. Max commented on Aug 28

    Don’t know what to do with all the cash? – Give it to me, I have a few ideas. :)

  16. RS commented on Aug 28

    The right thing to do is declare a dividend.

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