This study will utilize the financial release made by Google Corporation as on the 31st December 2010. During the year the company invested $ 150,000,000 in government bonds. The company invested $ 1,172,000 worth of bonds in foreign government bonds. This gives a total of $ 1,322 million net worth of bonds in cash and equivalents as well as market securities. The company has not issued any bond to potential investors but instead has turned huge amount of its revenue to investments in the USA government as well as foreign governments.
The rating can be regarded as high credit quality investment grade (AAA) which is the highest rating, owing to the fact that the investment is made to governments, the risk of default is relatively low compared to investing in other companies and individuals. As on the 31st of December, according to the balance sheet brought forward, Google earned approximately $ 1.6 billion of cash collaterals as a result of their securities lending programs. This means that as far as securities are concerned, Google is a lender and had no borrows in the said financial year. The bonds had been invested in reverse repurchase agreement and were to mature within 3 months.
Since the amounts of bonds are relatively big ($1,322 million), their values can be calculated by multiplying the amounts by the current rate (yield). Currently, the price offered in three months is approximately 0.07 and this translates to about $ 92,540.000. The yield is considerably high and suggests quality and timely investment plan.
Google trading price for it class A common stocks have in the past went through volatility when it comes to pricing. For instance, in 2010 the prices were between $ 433.63 to $ 630.85 per share. This trading price changes due to common factors like disclosure by either the company or its competitors of their new products, acquisitions or capital commitments, quarterly results variations due to the outcome of their operations or their competitors, in the case where the analyst expectations differ with the actual results, it might have an adverse effect on the shareholders who might have speculated higher returns from judging the analysts expectations (Robinson et al., 2009). The fluctuations are more likely to undervalue the market price of the stock. An investor purchasing the stock when it is undervalued is more likely to benefit from the transaction owing to the fact that the price might go up when the temporary factors have been solved by market forces. Similarly, when the above factors affecting class A shares lead to the overvaluing of equities, chances are that an investor purchasing at that time will incur loss or poor returns once the prices come down.
Google Inc. has the Transferable Stock Option (TSO) which started in the year 2007. Under this program, eligible employees are enabled to sell their stock to registered financial institutions using online auctions. Interested investors and third parties thus have an opportunity to purchase stocks via this window. For the previous years, the gains at Google have been shooting up boosting investor confidence. The market price for the TSO is normally undervalued and this adds an advantage to the successful buyer owing to confidence in profit margins made by the company year after year.
Class A common stocks have only one vote per share compared to 10 votes for the class B common stocks. By the beginning of the year 2011, three individuals owned nearly 91% of class B shares thus translating to approximately 67% of the voting rights and power. It follows then that the trio has uncontrollable powers to influence every decision for the company including the appointments of directors, company transactions, acquisitions, mergers and other important decisions (Norton, 2006). This means that stockholders have very limited power to make any suggestion for the company and hence the shareholders may view the settings less beneficial, thereby, subjecting class A shares to fluctuating prices. In order to attract potential investors, management might think of undervaluing the stocks to enable stockholders to purchase more of class A stocks.
Finally, stock-based compensation rose by $ 212 million from 2009 to 2010. The reason behind the increase was attributed by the increment of the employees who had to be awarded stock. Existing employees also had their stock increased. This significantly lowered the value of the stock.
According to the company directors, they do not wish to acquire futures owing to the fact that swaps are more likely to bring the issue of dilutive issuances as well as contingent liabilities, write-offs of goodwill or even the amortization of prices. All of these precautions could harm the financial position of the company (Sandretto, 2011). The company fears that their anticipated profits from such acquisition of futures may not materialize.
Top executives agree that acquiring futures, swaps, options are important to the internet company since the transactions could be material to their financial positions and positive results in their operations. However, the procedures of integrating an acquired business or technological invention might result in unforeseen operating problems and spending. Some of the reasons they cite as risks include the splitting of managerial time to focusing on the performance of integrated companies in the expense of their own business operations. The overall integration of the acquired businesses with their own operations would also compromise the company’s human resource, accounting, coordination, sales and various other administrative procedures. There might also be a cultural difference between the acquired companies and theirs and the process of integrating their employees with the acquired company might be difficult to implement or might take a long time and this may adversely affect their gains.
Other risks include taking responsibility of litigations or other claims linking the acquired business and the loss the company may record if it fails to develop the acquired technology. It is put in mind before any decision to acquire companies is reached. In May 2010, Google acquired AdMob which was a mobile display advertisement technology provider at a price of $ 681 million. In February of the same year, they acquired a video developer compression technology at a price of 123 million. These are some of the examples the internet company has swapped to its operations and in the end might make the company a top seller with minimal competition. Acquisition of competitors companies make them market determinants and put them in an excellent shape to conduct their developments without the fear of losing to the competition.
The company engages itself in currency contracts with financial institutions to curb the risk of their cash flows being negatively affected by the fluctuations of the foreign currencies. They take derivative instruments as liabilities or assets on the accompanying consolidated balance sheet at fair values, they then recording fluctuation in their fair value of the derivatives in the accompanying consolidated statements of income as interest and other income, net, as part of revenues.
Google utilizes options assigned as cash flows hedge some foreseen revenue transactions which utilize other foreign currencies rather than the dollar. They start by reporting the gain on the effective portion of a cash flow hedge of the accumulated other comprehensive income and thus classify again to revenues when the hedged revenues are recorded or as interest of other income.