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Google Sitting on Top of Cash Mountain

The Internet powerhouse reveals a stock split intended to keep investors happy while the company makes "big bets" on the mobile future.
David Rosenbaum, CFO.com | US
April 13, 2012

On Thursday, Google revealed that it will issue a third class of shares, Class C, which will be traded on Nasdaq. The new shares will be allocated to current Class A and Class B shareholders on a one-to-one basis — effectively a split that will, Google hopes, satisfy shareholders looking for cash dividends that will not be forthcoming. In contrast, fellow Internet giant and Google competitor Apple earlier this year announced its first-ever cash dividend.

The fact that Google's new stock will be nonvoting helps ensure that, as has been the case since the company's founding, investors will have little ability to influence its long-term strategic decisions. Indeed, Google CEO Larry Page pointed out that although the stock issuance will need shareholder approval, that approval is a given, as the co-founders, Page and Sergey Brin, along with executive chairman Eric Schmidt, control about 70% of the votes.

In yesterday's earnings call, Google CFO Patrick Pichette reported revenues of $10.65 billion in the first quarter, a 24% increase compared with the same quarter in 2011, and announced that Google held almost $50 billion in cash and cash equivalents. That vast reserve, said Pichette, is "a strategic asset" that will allow Google to focus on what Page repeatedly called long-term strategic "big bets." Those include its investment in the Android mobile operating system, building out the Google social network while adding new products to it, developing tablets at lower price points, and pursuing growth opportunities such as last summer's $12.5 billion acquisition of lagging cell-phone maker Motorola Mobility and its 17,500 patents.

Analysts suggest that Motorola's patent trove may help smooth Google's path to the increasingly mobile future, which the company has targeted as a strategic necessity but that may be bumpy both technologically and financially.

On the financial side, Pichette revealed yesterday that the cost-per-click (CPC), the average amount Google is paid by advertisers every time someone clicks on their ad, fell 12% compared with the first quarter of last year. (The total volume of paid clicks, said Pichette, increased 39% year-over-year, more than making up for the decline.)

That reduction in CPC reflects the fact that mobile ads are less expensive than ads displayed on desktops, but Pichette said he wasn't worried about the drop affecting the overall health of Google's ad business. He argued that a lower cost to advertisers would provide them with a better return on investment and, in turn, lead to greater volume in Google's advertising business as it operates, as chief business officer Nikesh Arora put it, across all "screens and formats." Arora also insisted that over the long term, mobile search advertising will monetize even better than desktop PCs. The advertisers "don't care where the transaction happens," said Arora. "They care about ROI."

On the tech side, Craig Opperman, a leading expert in intellectual-property strategy and a partner in DLA Piper's Intellectual Property and Technology Group, says CFOs are beginning to view patents as assets "because people are paying straight money for them" rather than regarding them as "obscure legal rights."

Opperman, however, believes that there's "no way" Google actually knows what's in all of Motorola's 17,500 patents — how many are actually relevant to Google's businesses — as it would take more than 17,000 person hours to investigate all of them. "Statistically speaking, you just can't have 17,000 valuable patents coming out of Motorola," he says, especially because many are old and patents "typically devalue over time."

In the short term, says Opperman, the Motorola patents are about "protecting Android and being armed for the mobile phone wars." Android is currently embroiled in dozens of patent suits and, says the analyst, "Patents don't really provide the solution to a technical problem; they protect the solution to the problem. It's unlikely Google will find a solution in the [Motorola] patents" but, in the long term, the company needs to figure out ways to monetize the patents for which it paid so much.




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