Why is Google doing a public offering?
If Google actually gets the numbers they’re shooting for, they’ll have an easy 2 billion in cash reserves.
But why? What do they need this money for? Lord knows nothing they’ve done, and none of their services, requires the kind of hardware or labor to use such a sum.
Google is the industry golden child right now. I have difficulty reading this as anything but a loss of faith by the company founders; they’re cashing out while the iron is hot.
Thoughts?
DI
damnit, read something about this on slashdot a while ago, but I forget what it said. lol
[quote]KnightRT wrote:
But why? What do they need this money for? Lord knows nothing they’ve done, and none of their services, requires the kind of hardware or labor to use such a sum.
[/quote]
Um…they DO need money for hardware to continue to keep indexing the web the way they do. It takes a ridiculous amount of storage space to store and backup the website index google uses to search for websites.
Add to that now their offering of free 1 GB email and you’re lookinf at several hundred terabytes of space needed, never mind redudant backups and all that.
For a more humorous read:
http://www.google.com/technology/pigeonrank.html
Google’s hardware cost is negligible. They use off-the-rack hardware in a massively parallel configuration for their search service, and storage costs next to nothing.
Think in terms of proportions. Each ‘server’ is about $400. They use between 15,000 and 50,000 of them. That’s 20 million in hardware on the high side, or 1% of 2 billion dollars. Let’s be generous they use another 20 million yearly for programmers.
What the hell is the other 98% for?
DI
WHY?
Because it’s money and you can never have enough of it.
Because when you hit the lean times, you need operating cash.
Because when someone comes out with a better platform - and someone will come out with a better platform - you need time to pay your wages and adapt.
Because you can probably receive tax benefits by taking it out over time (in the form of dividends).
Because when you’re sued - and you will be sued - you need cash available so you don’t have to liquidate assets.
Because the interest on that kind of money alone will generage huge amounts of revenue, even in the lowest paying investments.
Because Google probably has about a billion or more shares authorized. If the corporation holds its own stock now (known as capital stock), it has great potential for losing value as the hype to own Google decreases. For example, Yahoo was worth nearly $110/share shortly after “going public.” About 18 months later, it was trading at about $5/share. Using Yahoo’s numbers, if they wait until then to release a million shares of capital stock, they will lose $105,000,000 plus a year and a half of interest (roughly another $10,000,000+).
There are about a thousand reasons why you would do that.
Aside from couple of good reasons why Google is going public, such as you can never have enough cash. Few months back, I heard the news that Google was approaching 500 share holders or a little bit over it. When you have more than 500 share holders, a company is required to make your books public just like any other public traded company. So since they have to “go public”, they might as well take advantage of an IPO.
[quote]
Because when someone comes out with a better platform - and someone will come out with a better platform - you need time to pay your wages and adapt.
Because you can probably receive tax benefits by taking it out over time (in the form of dividends).
Because when you’re sued - and you will be sued - you need cash available so you don’t have to liquidate assets.
Because the interest on that kind of money alone will generage huge amounts of revenue, even in the lowest paying investments.
Because Google probably has about a billion or more shares authorized. If the corporation holds its own stock now (known as capital stock), it has great potential for losing value as the hype to own Google decreases. For example, Yahoo was worth nearly $110/share shortly after “going public.” About 18 months later, it was trading at about $5/share. Using Yahoo’s numbers, if they wait until then to release a million shares of capital stock, they will lose $105,000,000 plus a year and a half of interest (roughly another $10,000,000+).
There are about a thousand reasons why you would do that.[/quote]
And not one tells me why they’ve decided to go public. My basis point is that they don’t need the money; they pull in enormous revenues from text advertising, and nothing they do has a tremendous amount of overhead. It isn’t like Intel, who has a drop 5 billion on a new fabrication plant every 10 years.
Your very first point seems to be the reason, but I wonder if the investors will be among those that benefit.
DI
Google does a lot of R&D in addition to just maintaining a search engine. Check out http://labs.google.com/ for the projects that have made it into the public eye.
[quote]KnightRT wrote:
And not one tells me why they’ve decided to go public. My basis point is that they don’t need the money; they pull in enormous revenues from text advertising, and nothing they do has a tremendous amount of overhead. It isn’t like Intel, who has a drop 5 billion on a new fabrication plant every 10 years.
Your very first point seems to be the reason, but I wonder if the investors will be among those that benefit.
DI[/quote]
I thought you were asking about why they wanted such huge cash reserves. Sorry 'bout that.
As for why companies go public - well, it’s all about the money. It doesn’t give them any more protections, and in fact, only forces them to file more items with the government. So, the only real reason for doing such a thing is to take advantage of the bumb in value that “going public” will offer.
It usually works like this:
1.) A couple of people come up with an idea. They invest some time and money into it. They form a corporation (to offer limited liability) and issue themselves each a few hundred (of the billion authorized) shares, at $.01/share (or some other nominal rate).
2.) The company starts growing. They decides they need some additional cash. Instead of borrowing, they get additional friends/family to invest. They sell them some stock at $.50/share. They also sell themselves some to make sure they have control of the company.
3.) The thing really takes off. They decide they want additional funds, but don’t know anybody with that kind of money. Instead, they go to investment bankers. These guys each buy 10,000,000 shares at $1/share.
4.) The company really is hauling and has a large customer base. The investment bankers, family members, and creators want to hit it big and get paid. They decide to “go public.” When they do, they stock opens at $75/share, but then quickly moves to $100/share.
At this point, the owners (who keep issuing themselves stock at nominal rates in order to keep control of the company) are billionaires, the family members are multi-millionaires (getting a return of 200:1), and the investment bankers have turned $10 million into $1 billion dollars.
It’s all about the money.
One of my professor’s friends is an investment banker. His company turned $10 million into $3.2 billion with Oracle and stands to make about $3.3 billion on Google. This kind of profit is what drives and helps fund major insurance companies and large college endowments.
Going public is the only way to really make sure these guys “get paid,” especially the investment bankers. For every startup they invest in, only about 1 in 10 will make it to that level. So, $10 million per startup means they lose $80-90 million on the other projects, but then recover billions on the one that hits. It’s a home run or a strike out.
Going public is also the only way the initial investers/owners can diversify their risks as well. Until they can liquidate some of their holdings, they bear the entire risk of that company failing. If there is anything that the Enron scandal proved is that you never, never invest in just one company. Well, until the initial holders can move some of their own stock into a public market, that’s what they are doing.
The underlying thing in this is the fact that the SEC regulates the number of owners, type and # of investors, and a hundred other things. They wouldn’t have to go public if they could easily transfer their stock, but the SEC would frown on that as it would allow them to dodge their regulations for public companies and the new Sarbanes-Oxley laws.
Basically, all of this is a long way of saying “money.” They do it for money. But then again, couldn’t we put that down for pretty much everything.
I suppose you can’t have enough money, eh? Don’t need it, but want more anyway.
As you say, at least they’ll make the initial investors happy.
Thanks,
DI