Building a spanking HQ new is a sure sign of future underperformance.
- It looks very much as if Google is about to commit the cardinal sin of blowing $1bn from which shareholders have no chance of seeing a return.
- Google’s UK HQ is currently comfortably housed in rented offices close to Victoria station but it has decided to purchase land near King Cross and build new offices that will cost around $1bn.
- I have been watching stocks a long time and in my experience building a glitzy new HQ is the biggest sign of a stock that is about to underperform for a sustained period.
- It tells you that the company has run out of ideas for investing in projects that have a positive return for shareholders.
- It is a sign that company management is thinking more about itself than about shareholders.
- This situation and this mindset inevitably leads to lower growth in earnings and poor stock performance.
- One excuse likely to be proffered is the problem of returning cash to the US where it attracts a heavy tax on entry into the country.
- Google is only able to buy back shares and pay dividends with cash that is in the US.
- For me, this is not nearly good enough. Google still has the ability to invest in growing its business outside the US and this move clearly shows that it has run out of ideas.
- In my view, the excess cash should be returned to shareholders even if the company has to pay tax on repatriation.
- Shareholders receiving 70% of the cash that belongs to them is far better than receiving 0% which is what will happen when the cash is poured into a building to house employees that already have a home.
- I like Google long-term but this move really gives me cold feet.
Blog Comments
tatilsever
January 25, 2013 at 7:47 pm
Shouldn’t the analysis include how much rent the company needs to spend on rent if it does not own the building?
windsorr
January 27, 2013 at 11:33 am
yes it should. but this is not so much about the cost. Its more about what it signals in terms of the mindset of managment and the philosophy of the company and its inability to find good projectes for investement.
If anyone would like me to undertake and indepth analysis of this issue and how it has affected companies over the last 20 years I am more than happy to talk terms. 🙂
tatilsever
January 29, 2013 at 11:20 am
How about the satisfaction of satiating your fans’ thirst for knowledge and earning their admiration. Priceless ain’t it? 🙂
I’d hate to inquire about what you think of Amazon, trying to buy its headquarters while building a campus in the same town. 🙂 If this is about signaling though, I wonder if the mindset is different on the other side of the ocean. There are many well run, highly regarded US based companies that make a point of owning their main buildings, lest they “throw money at rent”. Often, it is not just about money. Some are so large, they actually have to build their own campuses lest they distribute their teams across too many buildings scattered around different neighborhoods, making intra-company interaction unwieldy.
windsorr
January 29, 2013 at 12:08 pm
It is but I can’t eat admiration unfortunately!! 🙁
Amazon is an infrastructure company. A large part of its greateness comes from the bricks and mortar infratrsucture that it owns meaning fast and cheap service to consumers. If a company can provide evidence that it is cheaper to own rather than to rent, eg by getting a martgage on the property at a nice low rate, then one can make a case for it.
Again a campus that grows up with the company is OK and having everyone together does have advantages. That being said in this day and age, geographical distance is no real excuse for poor communication.
The main issue here is what a spanking new HQ says about the managment mindset. What advantages will there be to shareholders by having everyone in Kings Cross rather than Victoria. None that I can see other than a thumping $700m hole in the cash balance for shareholders. If I was a shareholder of Google, I would rather pay 30% tax and have $700m returned to me.