A smart businessman went to a bank near the airport to borrow $10,000 for his overseas trip. The bank demanded collateral, so he left his Rolls Royce in their warehouse vault. A week later, he returned, paid back the $10,000 principal, the $19.23 interest (10% per annum for 1 week), and picked up his car.
After he did this several more times, the loan officer asked him, "It's obvious you have plenty of money. Why do you have to borrow every time you travel overseas?"
To which the smart businessman replied, "Do you realize how much it would cost to park my Rolls Royce at the airport for a week?"
Not mentioned: Google makes about 1/2 its revenues abroad and that cash is costly to bring back to the US (tax laws). So borrowing money in the US could bring their available US cash balance up to the "optimal" level.
A lot of cash rich multi-national companies have this foreign cash "problem." They earn it overseas and can't bring it back without paying U.S. tax on it, so they leave it there. On page 31 of Google's 10-Q it says that $17 billion of its $37 billion cash hoard at March 31, 2011 was held outside the U.S. and was unlikely to be repatriated to the U.S. for tax reasons. Of course that still leaves them with $20 billion in the U.S., plus whatever they've earned in the U.S. since March 31, 2011, but I guess borrowing an extra $3 billion at ultra-low US Treasury-like rates is an historically cheap way to top up the tank.
The issue also kicks off a dialogue with debt investors, which should give Google information about what revenue streams are regarded as most stable. That could be useful info if at some later date they want to spin off some of their activities.
If Random Megacorp X did this, I would think "Well, either they hired someone whose job it was to sell bonds and by God he is going to sell bonds whether it makes sense or not" or "Somebody's roommate/boyfriend/etc works at Citibank" or "There were a few expensive meals on a corporate account and, whammo, new bond offering."
Google is not a preciously unique snowflake. They're a big company. They're subject to all the usual pathologies of big companies.
In general, I agree with your sentiment. But I think the brush is a little too broad in this case.
The best time to borrow money is when you have a lot of money. Although time will be the final arbiter, this move is probably a wise one for Google given today's low interest rates.
Google wants the capacity to do really big acquisitions (like Facebook big). Assuming Google did decide they wanted to buy facebook for $70B, they would need to raise some serious cash. Much of Google's cash is in overseas accounts and would incur US income taxes if repatriated.
This $3B is a practice round. The $50M or so in wasted interest expense is the cost of an option to do a huge acquisition.
Could it also be a case of Google's financial planners thinking they "don't have enough debt" in the eyes of investors?
If their debt to equity balance sheet is too tilted, they could be perceived as 'lazy'. This move could be a way to acquire more debt that is easy to manage, as well as improve their credit rating (if they need it).
In some ways, I wonder if this is a move to boost their stock price, after the dip it took recently due to backlash from their earnings call goofiness.
"With corporate borrowing costs about as low as they can be it makes sense for Google to grab some cheap money, even though it has some $50bn in the bank or in short-term investments.
It also means the company can build a reputation among bond investors in order to raise more money in the future."
That makes no sense. If in the future Google’s fate should change such that the company becomes desperate for cash, no one will care about Google’s past good credit score. Bonds are always rated on future expectations.
I would think that this makes sense from a tax perspective. The Interest on debt, according to US tax law, is write-off-able. So when you combine a tax incentive with the fact that the rates are going to be very low, and that they already have a large warchest - this isn't just free money, the gov't is essentially paying them to take this money.
This deal is too sweet for any manager - who's fiduciary responsibility is to increase shareholder value - to take advantage of.
Reminds me of the Yuri Milner $150K convertible note to YC companies. It's almost that good.
Edit: Modigliani and Miller actually devised a 'capital structure' theory that talks about the most efficient mix of debt & equity for a company - given that there are tax incentives for one or the other. So I would imagine that theory had some impact with their decision - http://en.wikipedia.org/wiki/Capital_structure
The point is that Google already has $37B in liquid assets, which are unlikely to yield more than 3.7% returns. As a point of reference 10yr US treasury bonds only return 3.3% and are definitely illiquid; 1 Tbonds return only 0.22%. I haven’t heard of any current liquid asset yielding anything near 3.7%.
If they really have investment opportunities that they are convinced will surpass 3.7% return, why aren’t they just using their existing liquid assets. I agree with other commenters that these funds are either in preparation for a large acquisition or just a dumb decision resulting from irrational and inefficient buracracy common to all large companies.
When you are as large as Google, it is the same: The interest you end up paying is whatever is supported by the market. Plus, no individual bank or lender is going to loan any company $3 billion dollars. That's just stupid.
The point of the article isn't the particulars of their debt financing, but the fact that they did, despite having so much cash.
Well, a manifestation of the main reason I stay away from owning stocks of tech companies. They do not share profits with the stock holders and pretend to know better how to put cash to use, because their current business generates a lot of money.
Not only does Google not share any profit with the shareholders, it is now taking more debt. Google does not need the cash for its business. The only use this cash may be put to is to make acquisitions. Hubris of the highest order when company managements think they know much better than shareholders, how to best use the profits the company generates.
Of course, in technology business, it is very easy for management to claim that they can become irrelevant very fast if they do not do so and so acquisition - just look at Nokia or Microsoft. Which may be true. But it does not take away from the fact that, shareholders do not share much profit in tech companies.
"Hubris of the highest order when company managements think they know much better than shareholders, how to best use the profits the company generates."
I hope you're not seriously suggesting that in a publicly traded company the shareholders know better than the management how the value of the company can be increased, therefore generating shareholder value? Google does have a publicly stated dividend policy, a policy that in the end is decided if not at least tolerated by the shareholders; tolerated presumably because they agree that it will give them the best ROI on their investment.
You sound like a value investor interested in dividends; good on you. However a large fraction of wall street is interested in "shareholder value", a nebulous phrase that boils down to "the share price is always going up".
As a rule, paying dividends doesn't increase the share price. Reinvested profits, huge mergers, along with bold press releases, increase the price.
Alot of good comment here, Giving and using criticism are both definite skills. I think another one is the ability to filter good criticism from the bad ones. Kinda like reading a book and picking and choosing what you want out of it.
Reminds me of something I learned as an Undergrad. TYFQO Thnk For Your Self Question Others
[+] [-] edw519|15 years ago|reply
A smart businessman went to a bank near the airport to borrow $10,000 for his overseas trip. The bank demanded collateral, so he left his Rolls Royce in their warehouse vault. A week later, he returned, paid back the $10,000 principal, the $19.23 interest (10% per annum for 1 week), and picked up his car.
After he did this several more times, the loan officer asked him, "It's obvious you have plenty of money. Why do you have to borrow every time you travel overseas?"
To which the smart businessman replied, "Do you realize how much it would cost to park my Rolls Royce at the airport for a week?"
[+] [-] snewe|15 years ago|reply
See pg. 21 of their 10-Q:
http://www.sec.gov/Archives/edgar/data/1288776/0001193125111...
[+] [-] veyron|15 years ago|reply
No brainer
[+] [-] Umalu|15 years ago|reply
[+] [-] chernevik|15 years ago|reply
The issue also kicks off a dialogue with debt investors, which should give Google information about what revenue streams are regarded as most stable. That could be useful info if at some later date they want to spin off some of their activities.
[+] [-] patio11|15 years ago|reply
Google is not a preciously unique snowflake. They're a big company. They're subject to all the usual pathologies of big companies.
[+] [-] alanthonyc|15 years ago|reply
The best time to borrow money is when you have a lot of money. Although time will be the final arbiter, this move is probably a wise one for Google given today's low interest rates.
[+] [-] unknown|15 years ago|reply
[deleted]
[+] [-] jcampbell1|15 years ago|reply
This $3B is a practice round. The $50M or so in wasted interest expense is the cost of an option to do a huge acquisition.
[+] [-] stock_toaster|15 years ago|reply
If their debt to equity balance sheet is too tilted, they could be perceived as 'lazy'. This move could be a way to acquire more debt that is easy to manage, as well as improve their credit rating (if they need it).
In some ways, I wonder if this is a move to boost their stock price, after the dip it took recently due to backlash from their earnings call goofiness.
[+] [-] nodata|15 years ago|reply
It also means the company can build a reputation among bond investors in order to raise more money in the future."
-- http://www.theregister.co.uk/2011/05/17/google_bond_sale/
[+] [-] hagy|15 years ago|reply
[+] [-] marcamillion|15 years ago|reply
This deal is too sweet for any manager - who's fiduciary responsibility is to increase shareholder value - to take advantage of.
Reminds me of the Yuri Milner $150K convertible note to YC companies. It's almost that good.
Edit: Modigliani and Miller actually devised a 'capital structure' theory that talks about the most efficient mix of debt & equity for a company - given that there are tax incentives for one or the other. So I would imagine that theory had some impact with their decision - http://en.wikipedia.org/wiki/Capital_structure
[+] [-] imr|15 years ago|reply
[+] [-] dkarl|15 years ago|reply
[+] [-] robryan|15 years ago|reply
[+] [-] hagy|15 years ago|reply
If they really have investment opportunities that they are convinced will surpass 3.7% return, why aren’t they just using their existing liquid assets. I agree with other commenters that these funds are either in preparation for a large acquisition or just a dumb decision resulting from irrational and inefficient buracracy common to all large companies.
[+] [-] asmithmd1|15 years ago|reply
[+] [-] gglanzani|15 years ago|reply
[+] [-] fleitz|15 years ago|reply
[+] [-] crikli|15 years ago|reply
[+] [-] asmithmd1|15 years ago|reply
[+] [-] orijing|15 years ago|reply
The point of the article isn't the particulars of their debt financing, but the fact that they did, despite having so much cash.
[+] [-] jagjit|15 years ago|reply
Not only does Google not share any profit with the shareholders, it is now taking more debt. Google does not need the cash for its business. The only use this cash may be put to is to make acquisitions. Hubris of the highest order when company managements think they know much better than shareholders, how to best use the profits the company generates.
Of course, in technology business, it is very easy for management to claim that they can become irrelevant very fast if they do not do so and so acquisition - just look at Nokia or Microsoft. Which may be true. But it does not take away from the fact that, shareholders do not share much profit in tech companies.
[+] [-] roel_v|15 years ago|reply
I hope you're not seriously suggesting that in a publicly traded company the shareholders know better than the management how the value of the company can be increased, therefore generating shareholder value? Google does have a publicly stated dividend policy, a policy that in the end is decided if not at least tolerated by the shareholders; tolerated presumably because they agree that it will give them the best ROI on their investment.
[+] [-] jacques_chester|15 years ago|reply
As a rule, paying dividends doesn't increase the share price. Reinvested profits, huge mergers, along with bold press releases, increase the price.
[+] [-] lichichen|15 years ago|reply
Reminds me of something I learned as an Undergrad. TYFQO Thnk For Your Self Question Others
[+] [-] zallarak|15 years ago|reply
[+] [-] sgricci|15 years ago|reply
[+] [-] Create|15 years ago|reply
[+] [-] petervandijck|15 years ago|reply
[+] [-] unknown|15 years ago|reply
[deleted]
[+] [-] known|15 years ago|reply