In the last couple of weeks, Standard & Poor's has announced that Google (Nasdaq: GOOG ) , Kimco Realty (NYSE: KIM ) , and Boston Properties (NYSE: BXP ) will be joining the S&P 500 index. In the last 24 hours, Google and Kimco have formed another group: companies doing secondary offerings in the wake of their announced addition to the index. I wonder whether Boston Properties feels left out.
Getting added to the S&P 500 index is not by itself a good reason for a secondary offering, and I have absolutely no idea whether both companies were planning to offer more shares for sale before S&P embraced them. Companies do secondary offerings for many reasons: They need capital and lack access to debt (the worst reason); they view their stock as overvalued; they want to enhance the liquidity of their stock (not a reason I'm a big believer in); or they want brokerage-house research departments to start covering their stock.
Both Google and Kimco are already liquid and well-covered by research analysts, and neither is exactly hurting for capital -- though as a REIT, Kimco's position is a bit different, as I'll get to in a bit. Although Google cites providing liquidity among its reasons for the offering, I view both companies' secondary offerings as a bit opportunistic. Their shares are fully valued -- in Google's case, more than fully valued -- and it's a logical time for both to raise capital via equity.
My colleague Rick Munarriz already looked at the Google offering today, and though he raises some interesting points, he left out one that interests me. Google's valuation is rich, and I see a perfectly valid argument for a company raising money while its valuation is lofty, even if there isn't an immediate need for the funds. The time to raise funds is not when you need it, but when they're easily obtainable on favorable terms. Google's opportunism may also have something to do with recent announcements that Blue Nile (Nasdaq: NILE ) and FTD Group (NYSE: FTD ) are trimming online ad spending because of rising ad rates. Google's hardly doomed, but like everything else, ad rates can't keep following a straight path upward.
As a REIT, Kimco is more likely to raise capital via a secondary offering than the average company, because REITs are required to pay shareholders 90% of their taxable income in the form of dividends. Kimco will also raise debt, enter into joint ventures, or issue preferred shares if it is in its best interest to do so. It's important for all companies to balance their cost of capital and capital structure, but with REITs, you see the process in action more often than you do with a company like Google.
In the long term, how Kimco and Google use the capital they have received will matter the most. Will they earn returns on it above their weighted average cost of capital? Kimco has a long history of doing so, but Google's history isn't quite so long. While aquisitions may be the most obvious use for Google's newly acquired capital, I'm unimpressed by the $1 billion that the company handed over to Time Warner (NYSE: TWX ) for a 5% stake in the America Online deal. However, that's just one transaction. I'm actually most curious to see whether Google holds onto the cash for a rainy day -- and how Google behaves when it's no longer the market's golden child.
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