By Miles Weiss
Friday, August 25, 2006
Google Inc., owner of the most widely used Internet search engine, is facing a hurdle other companies would love to confront: how to get better returns from investing its cash hoard without being regulated as a mutual fund.
Companies whose securities make up more than 40 percent of their assets can fall under restrictions that govern the mutual fund industry. So Google, which has increased its cash and securities to almost $10 billion since its 2004 initial public offering, asked the Securities and Exchange Commission late last month for an exemption.
At stake for Google is the chance to move more of its money from low-yielding U.S. government bonds to investment-grade municipal and corporate debt. That would help Google match the investment returns of rivals such as Microsoft Corp., which obtained a similar exemption in 1988.
"It's a high-class problem," said James Corcoran, managing director of Treasury International LLC, a Timonium, Md., firm that advises companies on corporate finance and treasury functions. "You have lots of cash and your return on capital may be coming down."
SEC spokesman John Heine and Google spokesman Jon Murchinson declined to comment on the application.
Google, based in Mountain View, Calif., had $9.82 billion in cash and securities on June 30, which came from stock offerings and company profits. According to an Aug. 9 filing with the SEC, it 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 could provide Google with an additional $100 million of income.
Microsoft, the world's biggest software developer, had a 7.3 percent average annual return on investments between 2001 and 2004, in part by buying common stocks as well as high-yield and emerging-market debt. For the year ended June 30, Microsoft had a 4.99 percent return on average assets of $35.9 billion.
"It's critical that Google be permitted to invest its existing capital in instruments" that would increase the amount of money available to fund future operations, new product development and acquisitions, Google said in its July 20 application for an exemption from the Investment Company Act of 1940. Being forced to invest in Treasurys, which don't count toward the 40 percent cap, reduces Google's returns and its "ability to compete with competitors," the company said in the application.
Google's $10 billion would make it a mid-size mutual fund. The largest is the $142 billion Growth Fund of America, run by Capital Group Cos. of Los Angeles.
It would be "extremely onerous" for a company whose main business involves anything other than managing money to be regulated as a mutual fund, said Kenneth Berman, a former associate director in the SEC's investment management division. For example, the 1940 law restricts companies' ability to borrow money as well as issue stock options.
The SEC will provide an exemption to companies that can show their primary business is 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.