Google’s Squillion Dollar Problem

Just how much shareholder’ cash should a business hang onto?

I’m not afraid to say I am a fan of Google: I love it to bits and want to publically thank it for how it helps me through every single working day. As we all know, Google dominates both desktop and mobile search: it seems untouchable in this market space. This means that it makes a lot of profit, and like super-profitable Apple and Microsoft before it, Google now also has piles of cash hanging around. The last number I saw was only $43Bn, less then half of what Apple had at one time but, heh, that’s a lot of cash.  I was trying to think of a suitable noun for that many dollar bills closeted together on one balance sheet and I have decided that “squillion” sounds right to me.

It is said that “cash is king” and I don’t need to elaborate here on the perils of finding out one day you just don’t have enough of it: a cash pile is a perfect antidote to recessionary economic times, periods of reinvention in response to change, or emergent competition. But what exactly do you do if you have more than enough cash to cushion you from market pressures, like Google clearly does? Although it is not the most transparent of companies, as it isn’t always clear what it is investing in, it is doing sooo much already it is probably maxed-out with re-investment activity. It could of course give it back to shareholders, but it doesn’t seem quite as keen as Apple on this course of action, at least for the time being. It could also invest its cash in anything from super- safe government securities, to a year or so of far more speculative acquisitions; a temptation that is worrying some shareholders.

Well, it seems that it has decided to kill two birds with one dollar coin: it is going to start lending to its immense online advertising client base, which has been so generous to date, providing all its profit. You could say it was planning to lend the money back to the kind people who gave it to Google in the first place (in order that they can then give it back to them again!) and charge them for the privilege: what a fantastic business model; it’s like taking candy from a baby.

Headlined as “Google gets into the credit business”, it has today begun to offer credit facilities to fund purchases of its online advertising by businesses in the UK. Within weeks it will have its own credit card in place in several countries. The balance sheet has become a source of competitive advantage it seems. Apparently, Amazon is doing something similar too. Google will be offering low interest rates of 8.99% in the US and 11.9% in the UK. A pilot in the US has proven that this sort of credit facility leads to more advertising. Google is quoted as saying that this is more of marketing initiative than a new profit centre, but I guess it combines marketing leverage with a relatively low risk investment strategy that, as an “asset class”, probably has the potential to achieve good returns for the risk.

It will be interesting to see how, what is effectively an extension of credit terms that a number of my clients have been forced to introduce in the last year or so, leads to; will it fade away once (or should it be if ?) we return to better economic times? There is a good argument to say that, in spite of its extraordinary success, Google’s management should focus on managing the business and it has excess cash well beyond its needs at the moment. Perhaps shareholders are better placed to reinvest at least some of their own money themselves? I would hope to see an Apple-following distribution to shareholders at some time soon: having too much cash can make management both lazy and wasteful, perhaps even the super-successful folk at Google.

Mark

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