Google the mutual fund company
No, Google isn’t managing investments. They’re still devoted to “organizing the world’s information,” but that doesn’t matter to the SEC. A rule enacted in 1940 could cause increased regulatory headaches for the company.
Companies whose securities make up more than 40 percent of their assets can fall under restrictions that govern the mutual fund industry.
Google apparently is still awash in IPO cash, prompting the question — why did they have it if they weren’t raising funds for something? They’ve got nothing better to do than sit on $9.8-billion, which makes up nearly 70% of their total assets?
It would be “extremely onerous” for a company whose main business involves anything other than managing money to be regulated as a mutual fund, said Kenneth Berman, a former associate director in the SEC’s investment management division. For example, the 1940 law restricts companies’ ability to borrow money as well as issue stock options.
This is kind of telling, now isn’t it? Stock options are bread-and-butter compensation for tech companies, including Google. Case in point, Microsoft and Yahoo had to apply for the exemption from the rule that Google is now applying for.
The SEC will provide an exemption to companies that can show their primary business is other than investing, owning and trading securities. Google’s application said the company’s Internet, advertising and new media operations accounted for 92 percent of net income in 2005.
I don’t think there’s much of a chance that Google isn’t going to be granted the exemption. It sounds like the threshold is pretty low for justifying that the business doesn’t qualify for the regs. And the numbers back it up.
Google has a problem though, and that is what to do with all that cash. Some have already begun speculating what would happen if Google wasn’t exempted from the rules:
Google would be more likely to expand its infrastructure than spring for a large company… Google’s acquisition history shows that the company sticks to smaller companies… They’re going to continue to focus on smaller acquisitions that are predicated on proprietary technology and talented developers and engineers.
Dividends are out of the question strategically, although they are technically an option. Once dividends are paid, the expectation is they will continue to be paid in the future and the market does not look favourably on companies that buck the trend. But then, there was this about a week earlier:
On its India web site, Google has invited applications from people who can “identify and evaluate acquisition opportunities across existing and future market opportunities, drive management team decisions, lead deal execution, and help manage post-acquisition integration and performance evaluation in the South Asia Region.”
So it looks like Google might have some takers for that cash after all. Investing in India is a smart move as well. What do you think Google should do about its abundance of cash?
I'm a Chartered Accountant working in internal audit.