When a company needs to raise money, it can usually either sell shares or sell bonds. This week Google took the bond route, writes CNN in its analytical material. But the choice to include the so-called. century-old bond has caused bewilderment for several reasons.
On February 10, the technology giant issued an extremely rare corporate bond that matures in 100 years, part of a multibillion-dollar series of loans the company is undertaking to fuel its ambitions to develop artificial intelligence.
Google - a public company with nearly $4 trillion and more than $73 billion in free cash flow annually - is turning to the debt markets to raise even more cash. That's because even Google's $126 billion in cash starts to look pretty paltry when the company says it plans to double its spending on artificial intelligence this year to a whopping $185 billion.
100-year bonds are extremely rare
Companies don't typically issue such extremely long-term bonds because they don't tend to last forever. People also don't tend to live that long or enjoy their lives very much. If you were a regular investor who bought a Google 100-year bond today, you wouldn't be able to see it "mature," let alone do anything with it. After all, you can't take it with you.
But centennial bonds make more sense for institutions like university endowments or governments that are expected to last for generations.
It's not unheard of for a company to issue them, but it's not common. And it hasn't always worked out well for those who have.
The Problem with Overconfidence
IBM issued its 100-year bonds in 1996, when its dominance in the tech scene was unquestioned. But almost immediately, aggressive competitors like Microsoft and Apple emerged to erode IBM's market-leading status.
Another '90s icon, J.C. Penney, sold $500 million of its century-old bonds in 1997, only to have those bonds sold for pennies 23 years later when the retailer filed for bankruptcy.
The last U.S. company to issue this type of debt was Motorola in 1997.
“In early 1997, Motorola was among the 25 largest corporations by market capitalization and the 25 largest by revenue in America,“ investor Michael Burry, known as “Big Short“, tweeted on Monday. “Motorola's corporate brand in 1997 was ranked number one in the U.S., ahead of Microsoft... Today, Motorola is the 232nd largest by market capitalization, with sales of just $11 billion.“.
It's a relatively small market
There is a market for these 100-year bonds, but it's not a huge one. They really only make sense to high-level institutional investors, such as life insurance companies and pension funds, that have long-term obligations to cover.
For now, at least, the market seems more than willing to give Alphabet some credit. And by some credit, we mean a lot: The company raised nearly $32 billion in less than 24 hours, according to Bloomberg, which first reported the 100-year bond offering. Alphabet sold debt denominated in British pounds and Swiss francs on Tuesday, following a $20 billion U.S. debt sale the day before. The 100-year bond was nearly 10 times oversubscribed, meaning investor demand far outstripped supply.
Google has some unique characteristics that work in its favor. Not least: The company has effectively become a government-sanctioned monopoly after a court ruling last year said that while Google violated antitrust laws, it did not have to fundamentally change its business model.
“If you're going to lend someone money for 100 years, a proven monopoly is probably not a bad place to go,” analysts say.