25 August 2006 | Author: C. Philip

Google seeks exception for investments

Google have recently found themselves with an investment problem...however, as problems go Google's is perhaps one which millions of other companies would love to have to confront. Origionally brought to light by the Seattle Post Intelligencer on Fri 25th August, Google's difficulty is that they must discover how to get better returns from investing their money mountains without being regulated as a mutual fund.

Becoming a mutual fund would be a headache for Google since, for one, a mutual fund cannot issue stock options. As a result, Google's lawyers are trying to find creative ways of obtaining an exemption. It's interesting to note that Microsoft and Yahoo! were previously able to get exemptions.

Last month, Google asked the Securities and Exchange Commission (SEC) for an exemption. The reasoning behind this is that companies whose securities make up more than 40 percent of their assets can fall under restrictions that govern the mutual fund industry. Google themselves have increased their cash and securities to almost $10 billion since their initial public offering in 2004. It is indeed an area of huge concern for Google, and an uncomfortable situation to be in. Google have built a globe-spanning business amassing huge cash piles and now may see their return on capital come down. Yes: it's tough at the top!

At stake for Google is the chance to move more of its money from low-yielding US government bonds to investment-grade municipal and corporate debt. That would help Google match the investment returns of rivals such as Microsoft Corp. Microsoft found themselves seeking, and being granted exemption in 1988.

The Figures
The following statement was is taken from Bloomberg.com
and shows Google's cashflow figures.

"Google had $9.8 billion of cash and securities on June 30 2006, which came from stock offerings and company profits. According to an Aug the 9th filing with the SEC, Google has earned an annual return of about 4 percent before taxes from its investments so far this year, excluding a one-time gain. Boosting this figure by 1 percentage point, to 5 percent, could provide Google with an additional $100 million of income".

Bloomberg also stated:

"It's critical that Google be permitted to invest its existing capital in instruments, [as] that would increase the amount of money available to fund future operations, new product development and acquisitions."

On the exemption request issued by Google on the 20th July, Google said that their ability to compete with competitors may be lost on being forced to invest in treasuries which don't count toward the 40 percent cap. The SEC will give exemptions to companies that can show their primary business is something 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.

Although we can speculate about the outcomes of Google's exemption plea and swing towards the positive, the fact is that we cannot be certain until the SEC give Google the stamp of approval

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