Why did Google take a $3B loan with $37B already in the bank? | Hacker News Reader

Why did Google take a $3B loan with $37B already in the bank?

online.wsj.com

70 pointsasmithmd152 comments

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?"

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...

Good point.

The issue also kicks off a dialogue with debt investors, which should give Google information about what revenue streams are regarded as most stable. That could be useful info if at some later date they want to spin off some of their activities.

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

No brainer

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

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

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

A lot of cash rich multi-national companies have this foreign cash "problem." They earn it overseas and can't bring it back without paying U.S. tax on it, so they leave it there. On page 31 of Google's 10-Q it says that $17 billion of its $37 billion cash hoard at March 31, 2011 was held outside the U.S. and was unlikely to be repatriated to the U.S. for tax reasons. Of course that still leaves them with $20 billion in the U.S., plus whatever they've earned in the U.S. since March 31, 2011, but I guess borrowing an extra $3 billion at ultra-low US Treasury-like rates is an historically cheap way to top up the tank.

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.

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.

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.

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.

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.

"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/

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.

Need to raise money != desperate for cash

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.

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.

I’ve been told that this comment of mine was overly naïve and idealistic and that such deals aren’t unheard of. My cynical side still views such deals as corporate politics that primarily benefit the individuals involved.

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

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

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

They get to keep their money for a rainy day, or put more money into projects than if they just used their own. All they have to do it make more than ~ 3.7% using the money in the bond issue.

If they are sure they can make at least 3.7% with 3 billion, why not use their own money? After all, they still have to pay back the 3 billion when the bonds mature; possibly using their rainy day money if they’ve squandered the borrowed funds.

This only makes sense if all of Google’s current funds are tied up in wealth generating investments and they want even more money to play with. I highly doubt Google’s liquid assets (cash on hand) yield such returns.

Could the individual(s) who’ve downvoted this comment please explain to me its serious flaws? (Feel free to email me at the address in my profile if the points wouldn’t be of interest to other users.) I’d seriously be interested in improving how I present short, comment-based arguments, as I generally don’t participate in such online discussions.

While I rarely comment on HN, this topic has really struck a cord with me as I’ve found many people (both online and in person) are focusing primarily on the low interest rate. While not an expert in corporate finance, I’m strongly convinced Google’s current liquid assets aren’t generating returns in excess of 3.7%. (See my comment in another thread of this discussion where I compare these returns to Tbonds.)

Unless Google has a revolutionary strategy for short term trading of liquid assets that generates returns in excess of 3.7%, in which they are so sure of they’ve committed their entire $37B cash-on-hand into, they’d be better off reallocating some of their existing liquid assets into whatever new investment they have in mind for the $3B.

The only other explanations would be preparations for a massive acquisition (major news) or this was done for some corporate politics reason (not news worth).

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.

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.

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

So Google is operating a hedge fund now?

Most large companies do.

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...

With the odd pursuits they attend to such as self driving cars, why not finance?

The point is that Google already has $37B in liquid assets, which are unlikely to yield more than 3.7% returns. As a point of reference 10yr US treasury bonds only return 3.3% and are definitely illiquid; 1 Tbonds return only 0.22%. I haven’t heard of any current liquid asset yielding anything near 3.7%.

If they really have investment opportunities that they are convinced will surpass 3.7% return, why aren’t they just using their existing liquid assets. I agree with other commenters that these funds are either in preparation for a large acquisition or just a dumb decision resulting from irrational and inefficient buracracy common to all large companies.

As mentioned elsewhere in this thread it's likely because a significant portion of that $37B is overseas and cannot be brought back into the US without paying US taxes on it. It's quite likely cheaper to take out a bond to raise more money in the US rather than bring overseas cash into the US.

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

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

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

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.

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.

When you are as large as Google, it is the same: The interest you end up paying is whatever is supported by the market. Plus, no individual bank or lender is going to loan any company $3 billion dollars. That's just stupid.

The point of the article isn't the particulars of their debt financing, but the fact that they did, despite having so much cash.

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.

"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.

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.

When a company is paying dividends it is usually because the stock has been flat, and there are no expectations for growth.

     I own a part of the company and as a result 
     own a part of the profit

You don't own any part of the profit, even if you would have a majority share. You own something only when it is given to you, otherwise it belongs to the company.

Also, voting power is directly proportional to how much you own. Why would you expect to have any saying in how the company is being handled if you own something like 0.01%?

     I am seriously implying that the managements in
     tech companies do not necessarily know better
     how to use the profits

Well, they got there in the first place, so they do have some credibility.

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?

You sound like a value investor interested in dividends; good on you. However a large fraction of wall street is interested in "shareholder value", a nebulous phrase that boils down to "the share price is always going up".

As a rule, paying dividends doesn't increase the share price. Reinvested profits, huge mergers, along with bold press releases, increase the price.

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

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...

Because they needed $40B.

I guess it is earmarked for linked.in

Cash to buy Twitter?

Profit booking

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