Google has close to $10 billion in cash. Even though it is significantly upping its capital investments (such as in data centers), the company is likely to post $1 billion in free cash flow this year.
However, Google is now confronting an obscure Securities and Exchange Commission (SEC) rule; that is, if securities make up more than 40% of assets, then a company must essentially become a mutual fund. This would be a headache (for example, a mutual fund cannot issue stock options). Consequently, Google's high-paid lawyers are trying to find creative ways of obtaining an exemption. In fact, years ago, Microsoft and Yahoo! were able to get exemptions.
But the $10 billion cash hoard raises some interesting issues. First of all, Google is getting low returns on the $10 billion – which have been roughly 4% this year.
Such a problem, of course, has dogged Microsoft. And, as a result, it has been buying back shares aggressively, as well as paying major dividends.
That would be a good move for Google. The company has been issuing lots of stock options. So, with a stock buyback, it can keep its share count tighter. It also will boost earnings per share.
Another approach is to use the cash to buy companies. But, as I've written in BloggingStocks.com, it looks like Eric Schmidt is not enamored with this strategy. After all, big acquisitions are likely to reduce Google's nose-bleed margins. Also, the history of success of mega deals is spotty.
Instead, it looks like Google is using its money to lock-up as much online real estate as possible. There was the $1 billion invested in AOL, as well as the $900 million deal with MySpace.
In light of Google's amazingly scalable printing machine, it makes a lot of sense to buy Internet traffic. But, interestingly enough, this is resulting in more and more free cash flow.
Ironically enough, it seems one of the biggest challenges for Google is what to do with the enormous cash that floods into the company. And, as the old saying: it's a good problem to have.
Tom Taulli is the author of various books, such as the Complete M&A Handbook and operates InvestorOffering.com.
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