Google's mastery of the Internet search market has turned it into a veritable cash machine -- but the company is hankering for more. On Mar. 29, it announced it will sell 5.3 million shares of its stock, which could raise $2 billion.
At first glance, it's a curious move for an outfit that boasts $8 billion in cash and short-term investments -- especially one that last year generated $2.5 billion in cash flow from operating activities. Google (GOOG) says the shares will fulfill anticipated demand for its stock when it is added to the influential S&P 500 index on Mar. 31. Proceeds will be utilized for "general corporate purposes," including possible acquisitions, the company said in a statement.
BEYOND THE WEB. Historically, Google has eschewed larger deals in favor of buying small startups that are still in research and development mode. But the search giant has begun to open its purse strings a bit more of late. And the sale of additional stock only gives it more dealmaking latitude.
In December, 2005, Google announced it would invest $1 billion in AOL (TWX), as part of an expanded alliance between the two companies. Google followed that up in January with the acquisition of dMarc Broadcasting, an outfit that facilitates radio advertising, for a sum that could range between $100 million and $1.2 billion, depending upon incentives.
Such expenditures could become more commonplace for Google as it seeks to expand an advertising stronghold beyond the Internet. The company has been bolstering efforts to be a broker of ad space in print magazines (see BW Online, 3/24/06, "Google's Print Auction Fizzles"). And execs have stated their desire to place better-targeted ads in TV as well.
OVERLY AMBITIOUS? Developing a strong beachhead in traditional media markets could require persistent and costly effort from the search behemoth. "It's a big fight to go against the traditional media companies," says Forrester Research analyst Charlene Li. "They'll need a lot of money to do that."
Another area that Google could bulk up with an expanded war chest: its effort to scan millions of books and make them searchable online. It's an ambitious, technically arduous project, and one that's met with mixed reviews from the start (see BW Online, 12/22/05, "Google's Great Works in Progress").
Then there's social networking. Google's networking site, Orkut, has taken off in Brazil, but hasn't exactly set the rest of the world on fire. Facebook, a site aimed at students, has put itself up for sale, and the hope is that it will fetch as much as $2 billion (see BW Online, 3/28/06, "Facebook's on the Block").
SEARCH FOR STABILITY. Piper Jaffray analyst Safa Rashtchy doesn't expect Google to use the new funds for big acquisitions. He reckons the company will finance ongoing projects, such as expanding in China and Japan. In China, Google is No.2 to local outfit Baidu. While Google is already in the midst of hiring lots of salespeople and engineers in China, it needs to redouble efforts to make itself a bigger local brand, Rashtchy says.
Adding to the pool of shares in the market could also bring some stability to the stock price, Rashtchy says. "It will become one of the most widely held stocks out there," he predicts.
In extended trading after the sale was announced, Google shares slipped 3%, to $383. Google's stock has experienced a bleak winter, sinking 28% from a high of $471 on Jan. 11. News that Google would be added to the S&P 500 has helped the stock recoup only part of those losses. For at least some Google investors, share-price stability wouldn't be such a bad thing in an otherwise topsy-turvy season.
Elgin is a correspondent in BusinessWeek's Silicon Valley bureau
with Olga Kharif in Portland, Ore.
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