Wednesday, August 5, 2009 2 comments ++[ CLICK TO COMMENT ]++

Interesting capital allocation decision by Google (assuming it was up to Google)

Here is an interesting capital allocation decision by Google. MarketWatch reports that Google is buying a small company called On2 Technologies for $106.5 million. The interesting thing to me is that Google paid with its shares* rather than paying cash.

I don't know the details and am not sure if the On2 board and management, acting on behalf of shareholders, were asking for Google shares rather than cash due to tax reasons—I'm not a tax expert but takeovers structured with shares but let's say they were not, and the decision was up to Google.

If it was indeed up to Google, it's interesting that Google is paying in shares rather than cash. Of course, this is a company with $20 billion in net cash so it's not as if cash is a problem. Paying in shares dilutes shareholders (although this deal is tiny for them) but it creates shareholder wealth if shares are overvalued**. So does Google benefit more in the long run by issuing shares? Is it signalling that its shares are overvalued? Hard to say but I find it somewhat interesting.


* Some may not realize this but Google has two share classes and the class B shares are owned by the founders and have super-voting priviledges.

** As Martin Whitman has remarked in his past shareholder letters, issuing shares when they are overvalued, or buying out other companies with overvalued shares, is a key method of creating shareholder wealth in America. Of course, this isn't so good for those receiving the shares. A lot of technology companies grew themselves with this method in the late 90's. A classic example of massive wealth creation was when AOL shareholders made billions by taking over Time Warner by using their overvalued AOL shares as currency in the merger.


2 Response to Interesting capital allocation decision by Google (assuming it was up to Google)

Daniel M. Ryan
August 6, 2009 at 1:10 AM

Back in the 1960s, the conglomerateurs raised "buying earnings" to a fine art. Here's how the game went back then:

1. Get your company's stock into high P/E territory, and wait for it to shoot up over a period of time. Forgive the crudeness, but sexiness counted.
2. Go on the acquisition hunt, for companies with much lower P/Es than yours. A company with a stock that's gone nowhere is preferable.
3. Make the tender offer with your company's stock. Many of the shareholders will be glad to exchange their own dull stock for that of a high flyer.
4.Buying a lower P/E stock with your own stock means that you've bought earnings at a discount. The acquired company's earnings are sure to be accretive right away.
5. Use the pooling-of-interest method, not the purchase method, to consolidate. It's not necessary to declare goodwill with pooling-of-interest. [Note, in case anyone gets any ideas: if I recall correctly, the purchase method is now mandatory. Back to the tale of days gone by:]
6. As soon as possible, report the accretion as EPS growth to the extent that the regs allow.
7. Lather, rinse and repeat. As long as conglomeration is sexy, the game can keep on rolling...

...until the bottom fell out in 1970. Most of the ones that survived were flattened in 1974.

As might be expected, many of those conglomerate houses were "Built by Bicycle."  

August 6, 2009 at 1:40 AM

In the nineties, the other thing CEO's did was issue as many options as possible to themselves, and then sell as many shares as possible each quarter into the market at an inflated pe.

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