Google Plans Second Stock Offering
Google Inc. makes raising money look as easy as pi.
A year to the day after its initial public offering, the Internet giant said Thursday that it would issue as many as 14.8 million new shares through a second stock sale, but the company left investors and analysts puzzling over how it planned to spend the cash raised.
In typical Google fashion, the offering included a bit of geek humor. Google said it would sell 14,159,265 shares to the public. That’s a nod to pi, the number representing the constant ratio of a circle’s circumference to its diameter. Pi’s first nine digits are 3.14159265.
In its registration statement with the Securities and Exchange Commission, Mountain View, Calif.-based Google said its underwriters -- Morgan Stanley, Allen & Co. and Credit Suisse First Boston -- had the option to buy 600,000 shares in addition to the nearly 14.2 million shares to be offered to the public.
The sale could raise more than $4 billion for Google at the stock’s current price, which is triple its IPO price of $85 a share. Raising that amount would leave the company with more than $7 billion in cash on hand. Google said in its SEC filing that it planned to use the money for capital expenses and potential acquisitions but had not committed to any particular deal.
A spokesman declined to elaborate. No sale date was set.
Google’s reticence to discuss plans for the proceeds caused analysts to speculate about a wide range of targets that might lessen the search-engine company’s reliance on Web ads that generate 99% of its revenue.
“It is a signal they’re going to acquire companies,” said Philip Remek, an analyst at Guzman & Co.
“I think it’s a very necessary thing for them to do.”
Potential buyout candidates floated by analysts included TiVo Inc., Chinese Web-search firm Baidu.com Inc., privately held Internet phone company Skype Technologies and Internet infrastructure firms VeriSign Inc. and Akamai Technologies Inc.
Analysts said Google’s most likely move was to buy its way into developing international markets such as Russia and China, where other Internet giants are spending heavily. Yahoo Inc. last week said it would invest $1 billion in Chinese Internet portal Alibaba.com and merge their China-based operations.
Another possibility is a move into telecommunications systems, such as technologies for making phone calls over the Internet. Skype is an early leader in that area.
Google has typically done small deals, such as the recent acquisition for an undisclosed price of Android, a secretive start-up.
Anthony Noto, a Goldman Sachs analyst, said in a research note to clients that Google was issuing the stock to have a more sizable “war chest vs. large, well-funded competition.” But Noto said he expected Google to spend no more than $1 billion to $2 billion on any deal.
One concern for some investors: If Google buys any public company, it will almost certainly drag on Google’s earnings because Google is one of the most profitable businesses anywhere.
“It’s good to diversify their revenue,” said Martin Pyykkonen, an analyst at Hoefer & Arnett. “The open-ended question is, can they buy anything that’s not very dilutive, considering they’re among the top tier of profitability in the Internet space?”
In any case, analysts lowered their profit estimates for 2005 and 2006 because the increase in Google’s shares will dilute the company’s per-share earnings.
The shares fell $5.11, or 1.8%, to $279.99, their lowest closing price since June 16. The stock has fallen 10.8% from the record closing high of $313.94 on July 21.
It’s still more than triple Google’s IPO price of $85. Given the stock’s meteoric climb -- and the historic volatility of technology stocks -- few observers were surprised that Google elected to build up its cash reserves. Scores of tech companies still sustain themselves with the cash raised during the boom of the 1990s.
For the time being, though, Google doesn’t need to sell stock to keep operating. It is on pace to generate more than $1.5 billion in free cash flow next year.
In Thursday’s filing, Google said it intended to use the money “for general corporate purposes, including working capital and capital expenditures, and possible acquisitions of complementary businesses, technologies or other assets.” The company added that it had “no current agreements or commitments with respect to any material acquisitions,” but it would keep its proceeds in highly liquid securities just in case.
Google is selling Class A shares, which carry one-tenth the voting rights of the Class B shares owned by Google’s top executives and directors. The offering would leave 191.1 million Class A shares and 101.7 million Class B shares outstanding.
The nod to pi isn’t the first math joke Google has sneaked into an SEC filing, typically a stuffy document. During the filing for its IPO, the maximum amount of money Google said it could raise, $2,718,281,828, was a tribute to the irrational number “e,” or 2.718281828, which is used in calculus to solve problems involving rates of growth or decay.
