
Why did Google take a $3B loan with $37B already in the bank? - asmithmd1
http://online.wsj.com/article/SB10001424052748703509104576327233056601082.html
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edw519
Reminds me of this oldie but goodie:

A smart businessman went to a bank near the airport to borrow $10,000 for his
overseas trip. The bank demanded collateral, so he left his Rolls Royce in
their warehouse vault. A week later, he returned, paid back the $10,000
principal, the $19.23 interest (10% per annum for 1 week), and picked up his
car.

After he did this several more times, the loan officer asked him, "It's
obvious you have plenty of money. Why do you have to borrow every time you
travel overseas?"

To which the smart businessman replied, "Do you realize how much it would cost
to park my Rolls Royce at the airport for a week?"

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snewe
Not mentioned: Google makes about 1/2 its revenues abroad and that cash is
costly to bring back to the US (tax laws). So borrowing money in the US could
bring their available US cash balance up to the "optimal" level.

See pg. 21 of their 10-Q:

[http://www.sec.gov/Archives/edgar/data/1288776/0001193125111...](http://www.sec.gov/Archives/edgar/data/1288776/000119312511134428/d10q.htm)

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veyron
Cost to repatriate money ~ 35% Cost to borrow money < 1%

No brainer

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snewe
To be precise, the cost of repatriation is min[(35% - foreign tax),0].

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karanbhangui
min? wouldn't the min almost always be 0?

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snewe
Ah, you are right, it's 'max'!

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patio11
If Random Megacorp X did this, I would think "Well, either they hired someone
whose job it was to sell bonds and by God he is going to sell bonds whether it
makes sense or not" or "Somebody's roommate/boyfriend/etc works at Citibank"
or "There were a few expensive meals on a corporate account and, whammo, new
bond offering."

Google is not a preciously unique snowflake. They're a big company. They're
subject to all the usual pathologies of big companies.

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alanthonyc
In general, I agree with your sentiment. But I think the brush is a little too
broad in this case.

The best time to borrow money is when you have a lot of money. Although time
will be the final arbiter, this move is probably a wise one for Google given
today's low interest rates.

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Bootvis
Indeed this is done often by BigCo. Raise money when you have stellar credit
rating and the terms are really favorable. They can keep the money to invest
later or hold it for a rainy day.

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jcampbell1
Google wants the capacity to do really big acquisitions (like Facebook big).
Assuming Google did decide they wanted to buy facebook for $70B, they would
need to raise some serious cash. Much of Google's cash is in overseas accounts
and would incur US income taxes if repatriated.

This $3B is a practice round. The $50M or so in wasted interest expense is the
cost of an option to do a huge acquisition.

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stock_toaster
Could it also be a case of Google's financial planners thinking they "don't
have enough debt" in the eyes of investors?

If their debt to equity balance sheet is too tilted, they could be perceived
as 'lazy'. This move could be a way to acquire more debt that is easy to
manage, as well as improve their credit rating (if they need it).

In some ways, I wonder if this is a move to boost their stock price, after the
dip it took recently due to backlash from their earnings call goofiness.

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nodata
"With corporate borrowing costs about as low as they can be it makes sense for
Google to grab some cheap money, even though it has some $50bn in the bank or
in short-term investments.

It also means the company can build a reputation among bond investors in order
to raise more money in the future."

\-- <http://www.theregister.co.uk/2011/05/17/google_bond_sale/>

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hagy
That makes no sense. If in the future Google’s fate should change such that
the company becomes desperate for cash, no one will care about Google’s past
good credit score. Bonds are always rated on future expectations.

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keiferski
Need to raise money != desperate for cash

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hagy
That desperation example should’ve been downplayed. The main point is that
bond rating is largely independent of a company’s reputation in handling past
debts; investors are primarily concerned with the company’s future ability to
honor their newly issued bonds.

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chernevik
Actually, investor and rating agency decisions are influenced by their history
with the company. So it can make sense to "introduce" a company to the debt
markets before it has an actual need for the capital.

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marcamillion
I would think that this makes sense from a tax perspective. The Interest on
debt, according to US tax law, is write-off-able. So when you combine a tax
incentive with the fact that the rates are going to be very low, and that they
already have a large warchest - this isn't just free money, the gov't is
essentially paying them to take this money.

This deal is too sweet for any manager - who's fiduciary responsibility is to
increase shareholder value - to take advantage of.

Reminds me of the Yuri Milner $150K convertible note to YC companies. It's
almost that good.

Edit: Modigliani and Miller actually devised a 'capital structure' theory that
talks about the most efficient mix of debt & equity for a company - given that
there are tax incentives for one or the other. So I would imagine that theory
had some impact with their decision -
<http://en.wikipedia.org/wiki/Capital_structure>

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imr
The interest rate was very low. Who wouldn't take nearly free money to play
with?

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dkarl
Their own money _is_ free. What do they want with "nearly" free? I still don't
get it.

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kwantam
If the interest rate they pay on the borrowed money is lower than the interest
rate they get from sitting on their cash, spending the cash has marginal cost
equal to the difference between the rates.

It always makes sense to borrow if the return on your cash is greater than the
interest on the loan.

~~~
dkarl
I see -- so they aren't borrowing so they have more money to spend on their
own projects; they're borrowing so they have more money to put in higher-
yielding investments. I guess that's just a perk of being such a good credit
risk.

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robryan
It's probably likely that they make a better return on their cash management
than the rate on these bonds?

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asmithmd1
So Google is operating a hedge fund now?

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adestefan
Kinda. There are too many legal implications to be a real hedge fund, but they
do actively manage their own cash. When you have that much money you don't
just plop it into a savings account.

[http://www.businessweek.com/magazine/content/10_23/b41810335...](http://www.businessweek.com/magazine/content/10_23/b4181033582670.htm)

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gglanzani
Like they say in "Kill the Irishman", real business-men never invest their own
money :)

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fleitz
Why? Because Google believes they can get a return on the money that exceeds
the interest rate. It's actually pretty simple.

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crikli
Linkbait title should be changed, really. There is a massive difference
between taking out a loan and issuing a round of debt securities.

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asmithmd1
No,I think they are exactly the same. When you get a car loan you just issued
a "debt security" to whoever gave you the loan.

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dspeyer
Except that here Google writes the terms (not just interest, all the fine
print) and the investors take them or leave them, whereas in a loan the bank
writes them and the borrower takes or leaves them.

Not really relevant here, but worth keeping in mind generally.

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jagjit
Well, a manifestation of the main reason I stay away from owning stocks of
tech companies. They do not share profits with the stock holders and pretend
to know better how to put cash to use, because their current business
generates a lot of money.

Not only does Google not share any profit with the shareholders, it is now
taking more debt. Google does not need the cash for its business. The only use
this cash may be put to is to make acquisitions. Hubris of the highest order
when company managements think they know much better than shareholders, how to
best use the profits the company generates.

Of course, in technology business, it is very easy for management to claim
that they can become irrelevant very fast if they do not do so and so
acquisition - just look at Nokia or Microsoft. Which may be true. But it does
not take away from the fact that, shareholders do not share much profit in
tech companies.

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roel_v
"Hubris of the highest order when company managements think they know much
better than shareholders, how to best use the profits the company generates."

I hope you're not seriously suggesting that in a publicly traded company the
shareholders know better than the management how the value of the company can
be increased, therefore generating shareholder value? Google does have a
publicly stated dividend policy, a policy that in the end is decided if not at
least tolerated by the shareholders; tolerated presumably because they agree
that it will give them the best ROI on their investment.

~~~
jagjit
Well, the one thing I am suggesting for sure is that when I buy a stock in a
company, I own a part of the company and as a result own a part of the profit.

And I am seriously implying that the managements in tech companies do not
necessarily know better how to use the profits. And sharing the profits with
stock holders is not to be looked down upon.

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Unseelie
So I'm a business selling stocks. I can sell them to a market which will buy
them purely on the speculation that they will rise, costing me nothing over
time, or I can sell them with a promise to pay the people who buy them money
for the rest of the existence of the stock....if the market's willing to buy
the purely speculative sort, what economic sense does it make for me, the
company, to sell the other?

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lichichen
Alot of good comment here, Giving and using criticism are both definite
skills. I think another one is the ability to filter good criticism from the
bad ones. Kinda like reading a book and picking and choosing what you want out
of it.

Reminds me of something I learned as an Undergrad. TYFQO Thnk For Your Self
Question Others

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zallarak
They might be trying to get an optimal mix of debt and equity, but its only
speculation: [http://en.wikipedia.org/wiki/Trade-
Off_Theory_of_Capital_Str...](http://en.wikipedia.org/wiki/Trade-
Off_Theory_of_Capital_Structure)

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sgricci
Because they needed $40B.

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Create
I guess it is earmarked for linked.in

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petervandijck
Cash to buy Twitter?

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known
Profit booking

