Google Grabbing More Cash

Internet darling and newly public company Google (Nasdaq: GOOG) recently announced plans to raise around $4 billion by issuing additional shares of stock. This offers a chance for us to review some basics about how the stock market works.

First off, understand that companies "go public" via initial public offerings, or IPOs. When they do so, they essentially sell off a chunk of themselves to the public in exchange for a gob of cash. (It's a little more complicated than that, I confess. Learn more about how companies go public.)

So when Google went public, as it did just about a year ago, it collected its major moolah. It issued some 20 million shares and raised nearly $2 billion dollars. The downside of going public is that the original owners no longer own as much of the company as they did before. Plus, now they have a lot more regulatory requirements to meet. The upside is that a lot of cash enters the company, which can be spent as needed.

After the IPO, a company's shares trade in the open market. So if you're buying shares of Verizon (NYSE: VZ) or selling shares of Lucent (NYSE: LU), you're not directly putting money into or taking money out of the pockets of those companies.

Verizon has nearly 3 billion shares outstanding and Lucent has more than 4 billion. These were issued long ago, and the companies got the money for them when they were issued. When the shares are bought and sold now, as they do in significant volume (an average of $7.7 million worth of Verizon shares and $42 million of Lucent shares trade hands each day, vs. $11 million for Google), the money involved flows in and out of the pockets of those investors doing the trading. (The companies are affected by the share price, but they don't receive the proceeds from sales.)

So what does a public company do when it wants more cash, fast? Well, one option is having a secondary offering. This means the company issues more shares, selling them to the public and collecting more greenbacks. And this is what Google is already planning to do. It's aiming to raise an eye-popping $4 billion.

The upside of the offering is clear: With several more billion dollars, Google can buy many companies and/or fuel new ventures. It gives the company power to grow more quickly. The downside is dilution. Here's a simplistic explanation: Imagine that Google is a pizza cut into eight pieces and you're a shareholder with one piece. You own an eighth of the company. But if the pie is suddenly redivided into 10 or 12 pieces, your ownership portion just shrunk. Of course, if the money raised increases the value of the company, your smaller shares may still end up being worth more than before. Back to Google.

Its proposed offering is significant because it's designed to bring in more than twice as much money as its initial public offering. As Matt Krantz explained in USA Today, "Google says it needs the cash for 'general corporate purposes.' But it already has $2.9 billion in cash and short-term investments, which is more than 80% of the companies in the Standard & Poor's 500 index, including eBay, Best Buy, and Southwest Airlines, according to Capital IQ data. Adding $4 billion would give Google a savings account bigger than 90% of the S&P 500 companies, including Boeing, Coca-Cola and Wal-Mart, Capital IQ says. That's why Scott Kessler, stock analyst at S&P, equates Google's follow-on offering to an 'arms race' with rivals Yahoo! (Nasdaq: YHOO) and Microsoft (Nasdaq: MSFT). Microsoft has $37.8 billion in cash and Yahoo $3.4 billion."

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Longtime Fool contributor Selena Maranjian owns shares of Microsoft. The Fool has an ironclad disclosure policy.