Towards a Google Buyback

I’m generally not a fan of stock buybacks. I’ve hated on the idea in the past, especially as regards high-flying tech stock Apple — but weirdly, I don’t have the same problem with the prospect of Google doing it.

CEO Eric Schmidt told Nat Worden that "the company is thinking about returning cash to shareholders" — something which prompted Martin Peers to say that Google "may be growing up", and Jeff Matthews to say that Schmidt is off his tree, since cash "is a valuable strategic asset that gives a company an enormous leg up when its competitors have had their legs cut out from underneath them".

I agree with Jeff that stock buybacks are a really bad way of trying to boost or support a company’s stock price. And I agree with him too that having billions of dollars of cash on one’s balance sheet is no bad thing in today’s economy. But in the case of Google, I can see an argument for a buyback.

Remember that in 2005, Google raised $4.18 billion with a secondary stock offering priced at $295 per share. In hindsight, that capital raise was not only unnecessary; it was also expensive. Google started throwing off billions of dollars in cash thereafter, and the $4 billion from the stock offering just disappeared into an ever-growing pool of low-yielding money — a pool which has now become a $14.4 billion lake.

Remember too that Google is explicitly not run for the benefit of its common shareholders. Votes and control are concentrated among a small group of insiders; the common shareholders merely choose to come along for the ride should they be so inclined. They don’t own the company, and they serve a pretty limited purpose: they put up a bunch of cash in Google’s two equity offerings, and they set a market price which enables the insiders to value their holdings.

But all those shares from the secondary offering don’t really need to be outstanding in order for those purposes to be served. Google doesn’t need that $4 billion any more, and in any case it’s been using its stock to buy companies like YouTube: the amount of common stock outstanding is going up.

With Google trading at about $375, it wouldn’t cost the company all that much, on net, to buy back the shares it needlessly issued in 2005. Now that it’s one of the biggest companies in America, people think of it increasingly as a blue-chip stock, rather than as the insider-controlled semi-private company which it really is. If those insiders started buying back the common stock, without any particular desire to increase the share price by so doing, that would actually be entirely in line with Google’s true nature.

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