Google Puts More Hair on its War Chest
In his formulation of the resource-based view of the firm, Jay Barney defines four key resources which can provide the basis for the (sustained) competitive of one firm over its rivals: physical, financial, human, and organizational. Although all manner of financial instruments are included the third category, none looms so large as cash. Large cash reserves afford firms definite opportunities, advantages, and performance benefits. For example, a study by University of Oregon finance professors Wayne Mikkelson and Megan Partch entitled "Do Persistent Large Cash Reserves Hinder Performance?" reported that:
"...high cash holdings are accompanied by greater investment, particularly R&D expenditures, and by greater growth in assets. For firms that persistently hold large cash reserves, we conclude that such policies support investment without hindering corporate performance." Journal of Financial and Quantitative AnalysisVol. 38, No. 2, June 2003
While the study is clearly well-executed, the results of empirical research studies like this indicate what it is, on average, that firms will do or experience. The results are normative rather than prescriptive and are of limited usefulness in predicting what investments a decidely non-normative, outlier firm like Google will make with its already large and rapidly expanding cash reserves:
The search engine giant has nearly $8 billion in cash reserves, but on Wednesday it announced plans to sell more than 5 million shares of stock to raise $2 billion more. This is the second time in a year it has gone to the stock market to raise cash. So what is Google planning to do with all that money? Will it buy another company? Will it hold on to the cash to earn interest? Will it challenge Microsoft or rival Yahoo? The chat boards are humming and it's become a hot topic at those infamous bankers' lunches on Wall Street. If a business, a bank or a savvy investor could predict Google's next move, a fortune could be made.