There are three stages of response to Google's (Nasdaq: GOOG) decision to raise nearly $3 billion in debt this week.
The first stage is denial. Why is Google panhandling? The company has $36.7 billion in cash, equivalents, and marketable securities. It can't be hard up for cash. Google is crazy!
The second stage is acceptance. Google's stock has lost its sizzle, trading 29% below its all-time peak in 2007. A bond offering helps grease the palms of underwriters, ideally leading to favorable coverage. A secondary offering would do the same thing, but disgruntled shareholders would only bellyache about new shares being minted at price points well below all-time highs. Even now, Google is trading closer to its 52-week low than its 52-week high.
We also can't dismiss the ridiculously attractive rates that Google is getting. The three- to 10-year notes will yield 1.25% to 3.625%, barely above what the government's getting on its Treasury notes.
Sure, Microsoft (Nasdaq: MSFT) and IBM (NYSE: IBM) were able to issue three-year notes at a mere 0.875% and 1%, respectively, last year, but 1.25% is nothing to sneeze at.
The third stage? Well, I'm back at denial.
This is a dumb move.
There. I said it.
Beg, steal, or borrow
Google is never going to use this money.
Really. What's it going to do with $40 billion that it couldn't do with $37 billion? Go on a shopping spree? I don't think so. The world's leading search engine is down to snapping up tiny companies. Any deals for needle-moving shakers -- including $700 million for ITA Software and $3 billion for DoubleClick -- take about a year to complete given regulator scrutiny. The bigger Google gets, the harder it will be for the dot-com darling to clear antitrust hurdles.
The reportedly $6 billion deal for Groupon that fell apart back in December supposedly unraveled over a stiff deal termination fee. In other words, Groupon wanted a meaty reward if regulators nixed the offer, and Google wasn't confident enough to come through with the insurance. Don't go thinking that Big G is raising money for a play on Facebook or Twitter. The days of the big deals are over for Google.
A cynic will argue that it's just as well. Google has been a lousy investor. It had to sell its $1 billion stake in AOL (NYSE: AOL) at a pittance a few years later. It also dumped its 2.3% stake in China's Baidu (Nasdaq: BIDU) at a split-adjusted price of $8 in 2006, missing out on a 15-bagger as its own stock has meandered.
Google can also use the money to hike its dividend. That's right. The world's leading online advertising platform hasn't even initiated a payout policy.
Buybacks? Share repurchases are possible. It went that route two years ago to offset its $750 million purchase of AdMob, but buybacks aren't really in its DNA. The number of fully diluted shares outstanding have grown by just over 1% over the past year.
Hacking away at the money tree
Google's official company line is that its borrowed funds will be used to pay back some commercial paper and for "general corporate purposes."
I don't buy it. Google has enough money to dream out loud -- both here and abroad. It can bankroll new ventures, go on a hiring spree, and nibble at acquisitions before vigilant regulators to its heart content.
The $36.7 billion that Google had on its books at the end of March is a fluid number. Google keeps making money, and that's not going to change. Its cash balance has grown by more than $10 billion over the past year alone. Its coffers runneth over!
Google is generating paltry interest income on its idle cash. Low rates cut both ways. Until Google comes up with a plan to use the money it already has, borrowing even more doesn't make a lick of sense.
Is Google's first bond offering a smart or dumb move? Share your thoughts in the comment box below.
