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

Comments

[SeekingAlpha Editors:]

Why tap investors for another $4 billion in a secondary offering?

Short answer: Because it can. With an $80 billion market cap, triple what it was on the day of its IPO, Google will be selling only 5% of itself. That's cheap insurance against the day that Microsoft wakes up and sees Google as the biggest threat ever to its hegemony.

Google's search engine is years ahead of Microsoft's. Microsoft is working hard to catch up. At the very least, it will narrow the gap. But rather than devoting all its resources to protecting its search lead, Google has made plans to fatten its war chest and swagger right into Microsoft's fortress--the personal computer desktop.

Google Desktop--a free program--will organize your PC's desktop. You can search for long-lost information stored in your files. Little Google windows will also alert you to incoming e-mail, stock quotes, news flashes, weather or whatever else you want. Google's goal is to nudge Microsoft into the background. Out of sight, out of mind.

Audacious. Of course, Microsoft is one tough competitor. Google knows this. That's why it's loading up on cash.

2005 Sep 18 04:19 PM