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Google Mutual Fund Status

No matter how amazing it may seem to most of you, in 2006 Google was a step far away from becoming a mutual fund. Google falls in the category of a media company and the likeliness of turning to a mutual fund is highly unfeasible.

How is this possible?

Under the conditions of the Investment Company Act of 1940, a company that has more than 40% in cash is considered a mutual fund. In 2006 Google broke that mark by holding approximately $10 billion in cash reserves.

Under the Act of 1940, a company is considered an "investment company" (also known as mutual funds) if it meets one of the following requirements:

  • Company that is engaged in investing or trading securities
  • Company that has more than 40% of its total non-controlling assets in other investments.

Generally, only few companies hold such a big proportion of their assets in cash, since it doesn't represent an efficient way of managing a company.

To make a simple calculation: Google's $10 billion will turn into approximately $12 billion after five years at a 4% rate per year. If the rate increases to 8%, the $10 billion amount will turn to $14.7 billion.

The Negative Implications of a Mutual Fund Status

Several negative effects will be triggered by the acquisition of a mutual fund status by Google. Some of them are:

  • More strict restrictions regarding investment options
  • Lost employee stock options as compensations
  • Higher level of information disclosure regarding the activities and goals of the company.
  • Capital distribution requirement to meet every year

Evasion of the Mutual Fund Status

Google has submitted an exemption with the SEC in 2006 in order to be deprived of a mutual fund status by their own will. They have pointed such reasons as the nature of the business, in which they compete, the need for more flexible investment options from which they will be otherwise deprived. Additionally, they have pointed out that their competitiveness will be greatly hampered by their failure to diversify and generate higher cash yields. Until now (September 13, 2006), their exemption has not been accepted. There are several other examples from the history on particular cases in which exemption askers have been Yahoo and Microsoft.

From Google's note to their investors, the main objectives of the company become clear. Namely, they clearly state that the main goal is not to engage in speculative investment activities. But instead to invest money on treasuries, money market funds and government agencies.

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