March 30, 2006 -- What is Google up to?
The search engine giant has nearly $8 billion in cash reserves, but on Wednesday it announced plans to sell more than 5 million shares of stock to raise $2 billion more.
This is the second time in a year it has gone to the stock market to raise cash. So what is Google planning to do with all that money?
Will it buy another company? Will it hold on to the cash to earn interest? Will it challenge Microsoft or rival Yahoo? The chat boards are humming and it's become a hot topic at those infamous bankers' lunches on Wall Street. If a business, a bank or a savvy investor could predict Google's next move, a fortune could be made.
Some analysts, like Steve Weinstein of Pacific Crest Securities, believe Google's explanation. The company statement indicates it simply wants more stock in circulation.
"Actually, there is a relatively low number of stock available," said Weinstein.
Next week Google becomes part of the Standard & Poor's 500 index. Many investors buy funds indexed to the S&P, and once a stock is added to the index, money managers typically must buy shares as they readjust their portfolios. That means that come Monday, there will be an inevitable increase in demand for Google stock, making it even more volatile.
According to Weinstein, it makes sense for Google to make more stock available on the open market before it becomes part of the 500. The money, he said, is secondary. "Two billion dollars isn't that much money for Google," he said.
Some Believe Cash Points to Secret Plans
But other analysts suspect it isn't that simple.
"I suspect there is more to this than meets the eye," said Bill Whyman, president of the Precursor Group, a research firm for institutional investors.
"Follow the money," said a banker who asked not to be identified for fear of alienating Google. "Why would they need $10 billion in cash?"
That's a big question, and it puzzles and intrigues many top high-tech analysts. Many would not comment on the record but provided pieces of the puzzle.
Google has been buying broadband capacity. It has acquired "dark" or unused optical fiber and companies that can provide ways to transmit data on power lines. It has recently hired experts in satellite communications and has experimented with WI-FI networks.
It can be good business to control the distribution system your company depends on for revenue. That costs money, but considering how much cash Google reels in, a quick call to a bank could seal any deal. The company doesn't need extra funds to build a "server farm" of equipment to store and manage Web pages. Nor does it need more money to add storage capacity or build a new network.
Cash, however, is more important overseas and is particularly helpful in emerging high-tech markets, such as India or China.
Cash also helps if you don't want the banking community or Wall Street to know what you are planning. The notion that Google might be stockpiling money for some form of sneak attack has generated speculation.
"The space they are in changes very quickly. They know that. Cash creates options and flexibility," said Whyman.
Analysts have long predicted that Google would start providing applications for the office or home on the Internet. That's long been the vision of Google's Silicon Valley neighbors -- Sun Microsystems and Oracle. The strategy would be to take computers from the desktop to the Internet. One recent rumor is that Google plans to offer an online Web storage service that would allow users to store all the data from their hard drives online on Google's centralized computers. The service, reportedly called GDrive, could help free users from dependence on desktop computers and operating systems.
If that's part of the Google strategy, it would redefine the industry. It would also pose a direct challenge to giant Microsoft and its dominant Windows operating system.
If so, $10 billion may not be enough. Microsoft has four times that amount in cash reserves. Although Sun and Oracle have both challenged the Windows world, neither has succeeded.
Charlene Li at Forrester Research looks at Google and sees a media company. "They sell clicks," she said. Google technology gets the right ads to the right people. It's efficient and cost effective. She sees its recent venture into selling advertisements on radio and in newspapers as just the beginning. "They are definitely going in that direction. It is a marriage of new technology and traditional media models."
What is clear is that Google is fast becoming the industry leader. Whatever it does will have an impact on the industry, and on how and what we do with that box on the desk. That's why those in the industry are so curious.
"They are in a great strategic position," said Whyman. "The question is, where do they go?"