Google Boosts Its Cash With In-House Trading

Google Bond Traders Swell Cash
An attendee at the Google Developers' Conference in San Francisco. Photographer: Kim White/Bloomberg
By Douglas MacMillan - May 27, 2010
Last fall, some unusual job listings began cropping up on Google Inc.’s website. Amid the requests for programmers and engineers were postings for bond traders and portfolio analysts. By spring, tech blogs were speculating about what was going on at Google.
The answer was very un-Silicon Valley. Google started a trading floor to manage its $26.5 billion in cash and short-term investments, Bloomberg Businessweek reports in its May 31 issue. The hoard is the third-biggest cash pile among U.S. tech companies, after those at Microsoft Corp. and Cisco Systems Inc.
One of the company’s goals is to improve the returns on its money, which until now has been managed conservatively. Google doesn’t disclose its rate of return on investments or the targets it has set. Analyst Aaron Kessler of ThinkEquity LLC estimates the company’s 2010 return, including interest income and realized and unrealized gains before tax, at about 2.5 percent. That’s a higher return than some other large Internet outfits, such as Yahoo! Inc. and Inc., he says.
Google is using some of its money to buy back shares in the wake of its $750 million acquisition of mobile-advertising firm AdMob, which was an all-stock deal. The transaction was cleared by U.S. regulators on May 21.
Investors have been wondering what else the company intends to do with its cash. International Business Machines Corp. recently announced plans to spend $20 billion over five years on acquisitions. Hewlett-Packard Co. just bought Palm Inc. for $1.2 billion.
10 Palms
“Google could do 10 Palm kind of deals,” says Michael Yoshikami, president and chief investment strategist of YCMNet Advisors, which owns Google shares. “That would be a pretty decent use of their money.”
Beyond the AdMob buybacks, Google has said it has no plans to return cash to shareholders.
Google’s trading room opened in January. The plan is to keep the war chest growing safely and ready to be deployed should the right mergers-and-acquisitions opportunities arise. The investment team has grown to more than 30 people, up from 6 three years ago. Many of the new arrivals are former Wall Streeters who left lucrative careers at banks like Goldman Sachs Group Inc. and JPMorgan Chase & Co.
The man in charge is Brent Callinicos, Google’s 44-year-old treasurer, who joined from Microsoft in 2007, back when Google had $11 billion in cash.
“This isn’t fast money, this is patient money,” he says.
Trading Mosaic
His crew works in a recently remodeled finance building on the company’s corporate campus in Mountain View, California, complete with a rock climbing wall, massage chairs, murals of tropical sunsets and bamboo wall panels. In a second-floor space accessed by key card -- the trading room -- the Wall Street vets tap out trades at desks with six computer screens.
Craig A. Jeffery, managing partner of Atlanta-based consultant Strategic Treasurer, says the financial technology at banks and most corporate treasuries tends to be an unwieldy hodgepodge of disparate software applications.
If you’re crunching numbers in Excel, you probably have to cut and paste the results manually into your foreign-exchange analytics software. Callinicos got around the coordination problem by tapping in-house engineers to meld the various pieces of software into one dashboard for trading and managing cash.
“Callinicos built this mosaic of systems and a way of relating them together,” Jeffery says.
Trading Advantage
That woven-together technology gives Google a trading advantage: It shows the value of the company’s holdings all over the world almost in real time.
This is harder than it sounds. Jeffery says most treasuries with dozens of bank relationships in multiple countries can see the values of only 60 percent or 70 percent of their positions at any given time. Google’s systems can monitor 98 percent of its holdings in real time, Callinicos says.
“One of the toughest parts of this is extracting the right data for the right decisions at the push of a button,” says Wolfgang J. Koester, CEO of FiREapps, a maker of financial software. Callinicos “has been an industry leader on this.”
Born in South Africa, Callinicos came to the U.S. at age 16. After receiving an MBA from the University of North Carolina, he landed in Microsoft’s finance department in 1992 and became treasurer in 2000. By the time Microsoft’s cash neared $60 billion in 2004 -- the year the company paid out a one-time $32 billion dividend -- it was generating returns of more than 7 percent.
Higher Returns
After a couple years of conservative cash management at Google, Callinicos says he’s beginning to build a higher-risk, higher-return portfolio. Since last year he has pulled away from U.S. government notes and moved into corporate debt securities ($4.9 billion as of March 31, up from $695 million the year before), agency residential mortgage-backed securities ($3.3 billion, up from $60 million) and foreign government bonds ($332 million, up from zero).
Callinicos doesn’t disclose which countries Google has invested in, though he says the company’s holdings were not directly affected by this year’s financial crisis in Europe sparked by concerns over debt in Greece, Ireland, Portugal and Spain.
“We’re not in the countries that are in the headlines,” Callinicos says. A currency-hedging program that Google began in late 2007 has helped to avoid the effects of a fluctuating euro.
Google does hold $181 million in auction-rate securities -- primarily student loans -- which began to fail in the first quarter of 2008, according to company filings. In March, the company estimated that these investments declined in value by $23 million and warned that the loss would be charged against earnings if it were forced to sell the securities before they recovered in value.
No Liquidity
“They got locked up in these securities with some other investors,” says Mike Gallanis, partner at Chicago-based consultant Treasury Strategies Inc. “The auction mechanism fell apart, and liquidity dried up.”
Google’s portfolio also contains $3.3 billion in U.S. government agency debt, $2.2 billion in municipal securities and $2.1 billion in U.S. government notes.
Google is still building its team. Its website lists openings for a foreign government bond trader, a risk analyst and a portfolio analyst of agency mortgage-backed securities. Callinicos says he’s looking for different qualities than those that large banks are seeking.
“We’re not trying to become a Wall Street firm,” he says. “This is Google. It’s eclectic.”
Sri Lankan Rapper
He cites Ranidu Lankage, who came to Google after a full- ride scholarship at Yale and a two-year stint at Lehman Brothers. When he’s not analyzing Google’s portfolio, Lankage is a star of Sri Lankan-style rap and R&B. He landed his first record deal with Sony Corp. at age 19.
Callinicos wouldn’t comment on what he pays his staff, though Gustavo G. Dolfino, senior managing director at financial recruiting firm Accretive Solutions, says Google pays finance staffers significantly less than what they would make on Wall Street. Google has not retained Accretive Solutions.
He adds that what Google jobs lack in pay they make up for in stability. “Everybody knows that Google isn’t going anywhere.”