Internet darling Google
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 the process here.)
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. 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 the company gets a lot of cash, which can be spent as needed.
After a company has its IPO, its shares trade on the open market. So if you're buying shares of Verizon
So what does a public company do when it wants more cash, fast? Well, one option is having a secondary offering. The company issues more shares, sells them to the public, and collects more greenbacks. And this is what Google is already planning to do: It's aiming to raise an eye-popping $4 billion.
The advantage of the offering is clear: With several more billion dollars, Google can buy many other companies and/or fuel new ventures. It gives the company power to grow more quickly. The disadvantage 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 therefore own an eighth of the company. But if the pie is suddenly redivided into 10 or 12 pieces, your ownership portion just shrank. 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 did. 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.
If dynamic, young companies like Google excite you and get you yearning to invest in them, consider taking advantage of a free trial to our Motley Fool Rule Breakers or Motley Fool Hidden Gems newsletters. The former focuses on firms shaking up the status quo (say, as nanotechnology or online pioneers), while the latter focuses on small-caps that are attractive values. You can (and should!) try any of our newsletters for free -- I suspect that their performance will impress you.
Longtime Fool contributor Selena Maranjian owns shares of Microsoft. The Motley Fool has a disclosure policy.
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