Are we now living in a hedgehog economy? Consider this from a transcript of a discussion between Eric Schmidt, the CEO of Google and entrepeneur Peter Thiel. Here’s Peter Thiel
Google is a great company. It has 30,000 people, or 20,000, whatever the number is. They have pretty safe jobs. On the other hand, Google also has 30, 40, 50 billion in cash. It has no idea how to invest that money in technology effectively. So, it prefers getting zero percent interest from Mr. Bernanke, effectively the cash sort of gets burned away over time through inflation, because there are no ideas that Google has how to spend money.
Knowing One Big Thing has made Google fantastically successful. Is knowing One Big Thing enough to produce a nimble, growing economy and employ people?
While I think Thiel definitely got the better of that exchange, it’s funny to see him of all people making that argument. I mean, if Google is a one-trick pony, then what the hell is Paypal? They’ve got half a trick at best.
I stumbled across it independently but I subsequently found that the discussion is getting quite a bit of play in the econblogs. I think Thiel’s got a good point but if there’s a lesson there it beats the heck out of me to fathom what it is. That big companies are so inherently conservative that they’re economically destructive?
While I think that we should strip big companies of some of the legislated advantages that they enjoy (something that, I think, short of revolution will never happen), I’m not sure how that applies to Google in particular.
The lesson may be that we’re really doomed to a lot less growth in economic activity in the future than we’ve seen for the last several decades.
Yeah. Thiel may want to make political hay out of it, but outside of the FDA’s overregulation of medical devices, I don’t see the government doing that much to make technology investments unprofitable. It’s more that we’ve just hit a lull – the great stagnation, as Tyler Cowen calls it.
I skimmed the article; I thought Google was doing a lot of R&D on energy-related matters for purposes of their data storage needs. That would be an example of a secondary ambition that could ovetake the primary focus of Google if successful; but maybe I misremember or energy is hard.
Good example. Google is spending tens of millions on research on energy. They’re sitting on tens of billions.
How much does it cost Google to invest in its core competencies? Probably not tens-of-billions but what do I know.
As an alternative, rather than sit on the cash, maybe they should start issuing dividends to stockholders.
Sorry guys. Non-mellow Drew here now. Thiels an idiot.
This is one of the oldest corporate finance debates there is. The subject of much scrutiny and academic work. Any business school grad who didnt go to some lame place like Harvard (sorry, couldnt resist) has gone through this one.
If Google doesn’t have a good place to invest management should not hoard the cash. It’s not theirs. It should be dividended out to shareholders to be redeployed………..hopefully productively.
Case closed.
That’s an excellent point and it answers my question (what’s the lesson?). The lesson is that there’s a problem with corporate governance, not just at Google but at Apple and GE and a number of other major players.
I must be missing something. Google started with search, and they started at the back of the pack. They were considered a joke at the time, but they never changed. The search users changed. Google is always working on new ideas, and the number that have not worked quite large. Google Maps, Google Docs, Chrome, Android, are a few, but the list is substantially.
Peter Thiel claims to be a Libertarian. I am not sure of his definition of Libertarian, but I doubt it matches any other Libertarian’s notion.
In any event, Google’s cash is not his.
I can see @Drew’s point, but I think it is viewed differently by the stockholders. The cash is an asset, and the stock is priced based upon it. If it were to be distributed as a dividend, the stock price would fall. This is my understanding, but I could be wrong.
TastyBits, I don’t think that the precise nature of Google’s business or Thiel’s ideology are particularly relevant here. If Google were a closely held private company, you’d be absolutely right.
But it’s not. It’s a public company. That’s the relevance of Drew’s comment.
Tentatively, I’d say that the particular problem at Google is that it’s a big, wealthy, public company that’s still operating as though it were a small closely held private company.
“That’s an excellent point and it answers my question (what’s the lesson?). The lesson is that there’s a problem with corporate governance, not just at Google but at Apple and GE and a number of other major players.”
I do not know if this was aimed at my comment or not. But in any event it’s called nailing it square on the head. I meant to make this point but got distracted by a call.
What B school profs do is posit the choice, and then go into a discussion of corporate governance. I, obviously, am a small business guy, and sit on these boards and we have, uh, er, “non-mellow” discussions about what to do with capital. As you all should know by now, I have no use for large corporate. It’s a different game with different incentives. And it stinks.
They are rent seekers, which is why we need limited government they cannot fully exploit. And they hoard capital for personal and management interests, which is why bigco boards are a farce.
The only thing worse is liberal orthodoxy. ( Paraphrased credit, and apologies to, Winston Churchill)
@Dave Schuler
I am confused, and I must be missing something.
I agree that it would be better for these companies to pay dividends, but I am not a stockholder. If the stockholders are the owners, they should be able to determine how the company invests. These stockholders have decided they want to own a company with lots of cash, and therefore, the companies invest in cash.
If the companies paid a dividend, the stock price would fall because the companies assets have dropped, but the stockholders want the stock price to rise. By increasing their cash, the company stock is more attractive, and its stock price rises.
I am far from an expert, and it is very likely that I am mistaken.
The answer to your original question is that a company cannot only do One Big Thing very long. Without government intervention, competition will catch up with them, but this brings in your Intellectual Property position.
The Libertarian remark was in reference to a comment by Thiel in the linked article. I was thinking about it as I was writing, and I see it does not pertain to this discussion. I did not intend to hijack the thread.
Tasty Bits
You are correct in that the cash on the balance sheet of a company is priced into the stock price. But it’s just an equivalency. If I own a share of stock priced at $100, and $4 is the value of balance sheet cash per share, then people are pricing the value of future earnings at $96′ and the cash at $4.
That’s a hair stylized, but that’s the basic deal. So what do you want to do with your $4? If you think Google management can deploy it at a superior rate of return, you are OK. If you don’t, and they don’t, (and beware management teams with too much cash on their hands) you want them to send it back to you as a return on your investment so you can do with it what you see fit.
Corporate finance/investment 101.
PS
Do people now understand why increases in taxes on dividends is the stupidest idea in the world? I don’t believe Obama and his advisors are that stupid. They know it would be best to pass the dividend back to the investor to be redeployed, rather than locked up by the corporation to avoid taxes or deployed by a management team void of new ideas.
It’s just a way to get money.
Dishonest fucks. Sorry, non-mellow Drew today.
@Drew
I am not making a value judgement. I agree that paying a dividend would be better, but the market disagrees with me.
For technology companies, the cash is needed to fight Intellectual Property wars. Microsoft and Apple are trying to strangle Google’s Android platform. They won most of the Oracle suit, but Oracle will most likely be back. The cash is also used to buy companies for their IP to be traded for licensing agreements.
The cash will also carry them through the years it takes before a product becomes profitable, and in some cases, it is more important to be in a technology area than making money.
RE: Taxing Dividends
They do not anticipate any change in behavior, and in addition to a revenue increase, it will get the “rich” to pay their fair share. Your protests only prove that they are right, and if you stay quiet, you must agree with them. “Heads they win. Tails you lose.”
This is not my position.
The ways and means of the stock market and value of stocks is beyond my understanding, most of the time. My Mom, though, has built up an impressive stock portfolio from scratch. She seems to have the instinctual savvy to buy, sell, and grow her assets. But, then she was always good at crossword puzzles and would take on Las Vegas with zeal, resulting in good fortune, which is how I view the DOW — no rhyme or reason, just lucrative possibilities guided strongly by the hand of luck.
BTW, I concur about the dividend tax increases being detrimental, especially for that older population who relies on this kind of income. Couple this with the estate tax going back up to 55%…it reminds me of those antique wringer washing machines you see in museums — where you would press wet clothes tightly between two rollers to squeeze the water out. The same thing is going on with the government, come 2013, in wringing as much money out of the people to feed their spending wishes and whims.
Yeah, I kind of wonder if the cash hoarding is part of a hedging strategy as well as a fund for various IP purposes. It seems pretty likely that questions about dividends were asked at shareholder meetings – it would be interesting to see what the response was.
TastyBits
If all your assertions in the first three paragraphs are true, then investors, the Board and management should be about the task of what you say. But there is no law of physics that says that what you say is the correct use of capital. That’s why people entrust Boards and management to make judgments. And with liquid, publicly traded securities you can vote with your pocketbook.
Your last paragraph on dividends is incoherent. Want to try again?
A couple of words stood out in my earlier skim:
Moore’s Law (predicted to end in ten years). What are the incentives and disincentives in technological innovation when you operate with the assumption of exponential growth? Might it eventually encourage waiting or at least small incrementalism?
Monopoly. Google seems to admit it has a legal or benign monopoly in search. That means to me they have constraints in how they can compete that other companies don’t have. Which step is too far? How much do we need to accommodate our competitors?
Jan
I was writing a masterpiece on investment and then hit the wrong button…….and it was lost into the ether. I was responding to your last post. If you are really interested, I’ll reconstruct it.
Yes, I would be interesting in reading another rendition of your ‘masterpiece,’ Drew, when you have the time to reconstruct it.
@Drew
Your last paragraph on dividends is incoherent. Want to try again?
I do believe “Obama and his advisors are that stupid.” They see a tax on dividends as generating a large amount of tax revenue. They do not believe there will be any change in investors behavior, but even if there is, the “rich” will be forced to “pay their fair share”.
In their world, the only reason you object to the taxing scheme is because it will work, and because you are “rich”, you do not want to “pay your fair share”. If you do not say anything, this means that you must agree.
I do not agree with the above paragraph. The only thing you and I disagree about is whether Obama and crew are stupid or not.
TastyBits. (you gotta love that moniker)
Got it. Well, I can speak authoritatively on small businessmen and women. large corporate? Different cats.
Look, there are people, including Michael, who I admire greatly, who simply think that people will put up with this bullshit. As Michael once put it, ” I’ll just write a few more pages.”
This of course is bizarre. First, is presumes unlimited demand. Second, it presumes no work vs liesure or work vs risk trade offs. Balls.
The most fundamental mistake liberals make is a misunderstanding of the ability of capital to either remain idle, or flee. Nobody can make someone invest just to take a risk reward tradeoff that doesn’t work. Especially true for people who have already made bucks. I’m one. And I see it every day. Second, in a global economy, there is no law that says that capital can’t go t o Eastern Europe, or Asia, or any other venue, rather the idiots in Illinois who want to extract rents for their political motivations. Those who vote Democrat and then wonder why there are no jobs really ought to look in the mirror and ask themselves about their morality.
OK. I’m on the rant train today. I admit it.
Drew, you have two good observations in your last post. The first one is:
“The most fundamental mistake liberals make is a misunderstanding of the ability of capital to either remain idle, or flee”
Do liberals think that people are really that stupid, where they will keep plugging along, working at the same pace, investing in over taxed, over regulated propositions just so they can be praised by government bureaucrats for toeing their line of thinking (aka ideological propaganda)?
Life is certainly not all about making money. But, it is also not all about being told what to do by higher up people who ‘think’ they know more than you do about your business! People who take risks, work hard, make money, reinvest that money, where they think is appropriate, have self-confidence, not government-confidence in making those decisions.
The second valid comment is:
“Those who vote Democrat and then wonder why there are no jobs really ought to look in the mirror and ask themselves about their morality.”
Ironically it is usually the employer or worker’s morality that is called into question. It is the people, the taxpayers, the innovators who are derided and told that their share is not fair enough. Meanwhile, you have more people opting for disability benefits than applying for jobs, more people being plied to go on food stamps than ever before, bigger swaths of people not paying any income tax, and somehow the wrath of the liberals continues to be heaped on the ones already doing the heavy lifting.
Jan
Concerning the first inquiry, our very own Michael Reynolds has expressed those very thoughts, which he captured in his quip that he would just write a few more pages.
I’ve said it until I’m blue in the face, I speak with small business owners constantly. Most are already financially set, and they have no need to submit to asymmetrical risk reward equations dictated by government.
These debates often take a false dichotomy: it’s either demand, uncertainty, deleveraging……..or it’s high employment costs. Of course demand etc have an effect. But thats a flash of the obvious. What many on the left simply just do not want to acknowledge is the effect of their policy prescriptions on expansion and hiring decisions. I generally don’t engage in mind reading, but I think it has to do with a mentality that is outside agency oriented, and not individual oriented.
“I’ve said it until I’m blue in the face, I speak with small business owners constantly. Most are already financially set, and they have no need to submit to asymmetrical risk reward equations dictated by government.”
A different subset of small business owners than most people think of when they say small business owner. Really not sure this is the group towards whom we should aim policy.
Steve
@Drew
Concerning the first inquiry, our very own Michael Reynolds has expressed those very thoughts, which he captured in his quip that he would just write a few more pages.
This would require one to be philosophically consistent.
“When I use a [concept],” Humpty Dumpty said, in rather a scornful tone, “it means just what I choose it to mean — neither more nor less.”
… I’ve said it until I’m blue in the face, I speak with small business owners constantly. Most are already financially set, and they have no need to submit to asymmetrical risk reward equations dictated by government.
I think your “small” is larger than my “small”. I have had an unpleasant experience with small business ownership, and far from being financially set, I am still trying to dig myself out of the financial hole. Most of the small business owners who are financially set are moving towards the medium category, or they are ready to sell their company.
And to be consistent:
“When I use a word,” Humpty Dumpty said, in rather a scornful tone, “it means just what I choose it to mean — neither more nor less.”
@jan
… more people being plied to go on food stamps than ever before …
Apparently, the US and Mexican governments were working together to educate US citizens living in Mexico about food stamp benefits, and it was started in 2004. Another case4 of the Obama administration continuing Bush administrating policies.
I give the Republicans a slight edge over Democrats, but I am slightly more aligned with the Republicans. I suspect the former is a result of the later, and I am not much better than anybody else. If that is true, I should get off my “high horse”, but why let reality spoil my fun?
Steve
But think about what you just said. Tax them because we’ve got them by the proverbial ya-yas. Super.
Further, if you really look at small businesses, the ones eaking out $50k or even $150K aren’t really going to be job creators. How do you hire someone when your profit is only in that range. The real job creators will fall under that region that Obama seems comfortable in castigating: $250K and up. And that’s a drag on job creation.
We haven’t had a taxing problem in this country in many years. We’ve had a spending problem. And look at the cities in California falling now like dominos. The borrowing window is closing. Time for the politicians to look in the mirror.
TastyBits
See my comment to Steve.