Why did Google file to sell $4 billion of stock? (GOOG)

| About: Alphabet Inc. (GOOG)

Google (ticker: GOOG) filed to sell 14.2 million newly issued shares (actually 14,159,265, as in Pi, 3.14159265), adding 8% to its float. The offering will raise about $4 billion, yet the company hasn't specified what it plans to use the proceeds for. Analysis:

  • Google has explicitly stated that it isn't planning large acquisitions. According to the WSJ (paid subscription required),
Google Chief Financial Officer George Reyes last week said Google wasn't planning any splashy purchases, but rather was focusing on "teams of engineers, great technologies that are available at fair prices." Speaking at an Aug. 9 Pacific Crest Securities conference in Colorado, Mr. Reyes added, "I wouldn't expect to see us do anything big anytime soon."

  • Yet the sell-side analysts speculate about acquisitions. Here's the WSJ's survey of analyst reactions; most focus on acquisition possibilities. For example, Goldman's Anthony Noto thinks that Google will purchase companies in China and Russia (a Russian technology company worth over $1 billion?????), and Morgan Stanley's Mary Meeker thinks that "this cash balance could allow the company increased flexibility to consider large strategic acquisitions". The sell-side analysts' shopping list includes AOL, Baidu, and smaller search technology firms.
  • Large acquisitions are inconsistent with Google's strategy. Google's acquisitions to date have been focused on enabling technologies, not on purchasing market share. But a billion-dollar-plus acquisition would almost by definition be a market-share acquisition, for example in the content creation business. Note that Google's founders have stated clearly that Google views itself as an aggregator and gateway to content, not a content creator. That rules out AOL. It's also unlikely that Google would purchase a firm like Baidu, since that would be an implicit admission that Google lacks confidence in its core competency - search technology.
  • That leaves two possibilities. Either Google wants the cash for large infrastructure projects, or it doesn't need the cash but thinks this is an opportune time (price) to sell stock. The type of infrastructure project Google would be strategically interested in would be information or data related, like its book-scanning project and Amazon's GPS photo project. (Amazon sends round GPS-enabled trucks to photograph buildings for use on online maps.)
  • Most likely? Google doesn't need the cash. Leading Internet companies are strong cash-flow generators. eBay has funded its acquisitions (such as Rent.com and Shopping.com) from the immense cash-flow thrown off by its business, as that's the best way for the company to maintain its return on equity. Google is already sitting on $2.95 billion as of end-June, and generated $625 million of cash in Q2.
  • Either way, this is bad news for GOOG investors. It goes without saying that if Google wants to sell for no reason other than stock price, that's a negative signal. But a large infrastructure project would also be a short-term negative, as Google's margins would be hit and revenue would be generated with a lag after expenses were incurred.