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The counterargument is that real estate is potentially an opportunity cost. Instead of purchasing real estate, that money could be used to grow your "core compe

by kqr2 16y ago

The counterargument is that real estate is potentially an opportunity cost. Instead of purchasing real estate, that money could be used to grow your "core competency", e.g. opening more stores, expanding into other cities, etc.

jbri 16y ago
This all sounds similar to the argument that Google should stick with search instead of moving into email. Or stick with Search + Email instead of moving into mobile devices.
- marcog1 16y ago
  Google's mission: "organize the world's information" - what information is being organized? "and make it universally accessible" - are they going to make the building universally accessible? "and useful" - I'm sure the building is useful without Google owning it :)
  - ugh 16y ago
    Google's mission: "organize the world's information" - what information is being organized? "and make it universally accessible" - are they going to make the paperclips universally accessible? "and useful" - I'm sure paperclips are useful without Google owning them :) Google really shouldn’t ever buy paperclips and the ones they bought in the past were clearly wrongheaded investments.
    - johnwatson11218 16y ago
      Also want to add to the original comment that google does have a lot of cash and my understanding is that they hire anyone who meets their high standards. So what is the downside to stepping outside of their core competencies and buying real estate? Put another way ... what else are they going to do with that money?
- kqr2 16y ago
  Actually, Google's core competency is selling targeted ads so they need to be wherever people's eyeballs are. So branching into email, mobile, etc. is actually a natural evolution.
jakarta 16y ago
The counterargument is that the ROIC of growth might be less than the real estate investment. I had a chance to do work for a board member of a public company. For 10 years they invested in R&D which was an utter failure and used up the majority of cash flow generated from operations. After halting most of R&D, cutting costs, the company was able to be turned around and cash flow positive.
- kqr2 16y ago
  Of course R&D may not pay off, however, in the long run, if your real estate is worth more than your business, then it probably means you are better at managing real estate than running that business. Perhaps it would have been better to have just done real estate in the first place.
  - jakarta 16y ago
    I don't agree with this kind of singular thinking. Capital should go wherever returns are best. If you have a steel company and you are at the top of the cycle, investing in steel plants or doing acquisitions in the steel space will be a destructive use of capital. Let's say you are Google and you do indeed believe that startup valuations are getting too high to warrant acquisitions. Maybe you pull back and look for other opportunities. You have $33B in cash and 10-years are only yielding ~3%. You're better off redeploying that capital to somewhere that will be truly accretive versus chasing bad deals or sticking in treasuries. Maybe right now the current R&D ideas just aren't appealing either. So you decide to sit tight in that area and go do a real estate deal where you can get a good IRR. Study Henry Singleton, the founder of Teledyne and see how he chose to allocate capital wherever he could get the most value at that particular point in time.
    - ams6110 16y ago
      When you're Google's size the normal rules don't always apply, but I would say that generally any "non-core" investments should at least have some strategic purpose. McDonald's for example, owns or leases huge amounts of real-estate, which they sublease to their franchisees. One reason for this is to maintain control over the franchisees. A franchise owner can't decide to close up and open a Burger King instead, because McDonald's would cancel his lease on the property. I'm not sure how owning real-estate relates to what Google does. They are not a retailer so the physical location of their offices is not critical. Even if a particular opportunity is a "good deal" it's still a distraction from their core business. Even if management and maintenance is subbed out, somebody in Google has to keep an eye on things to some degree.
joubert 16y ago
If you don't buy, you have to rent. They can't have the staff working on the sidewalks of 9th Ave., or on the Highline.
dspeyer 16y ago
There aren't a lot of opportunities. Most ways Google can grow are blocking on things other than money.

by kqr2 16y ago

jbri 16y ago

This all sounds similar to the argument that Google should stick with search instead of moving into email. Or stick with Search + Email instead of moving into mobile devices.

marcog1 16y ago
Google's mission: "organize the world's information" - what information is being organized? "and make it universally accessible" - are they going to make the building universally accessible? "and useful" - I'm sure the building is useful without Google owning it :)
- ugh 16y ago
  Google's mission: "organize the world's information" - what information is being organized? "and make it universally accessible" - are they going to make the paperclips universally accessible? "and useful" - I'm sure paperclips are useful without Google owning them :) Google really shouldn’t ever buy paperclips and the ones they bought in the past were clearly wrongheaded investments.
  - johnwatson11218 16y ago
    Also want to add to the original comment that google does have a lot of cash and my understanding is that they hire anyone who meets their high standards. So what is the downside to stepping outside of their core competencies and buying real estate? Put another way ... what else are they going to do with that money?
kqr2 16y ago
Actually, Google's core competency is selling targeted ads so they need to be wherever people's eyeballs are. So branching into email, mobile, etc. is actually a natural evolution.

jakarta 16y ago

The counterargument is that the ROIC of growth might be less than the real estate investment. I had a chance to do work for a board member of a public company. For 10 years they invested in R&D which was an utter failure and used up the majority of cash flow generated from operations. After halting most of R&D, cutting costs, the company was able to be turned around and cash flow positive.

kqr2 16y ago
Of course R&D may not pay off, however, in the long run, if your real estate is worth more than your business, then it probably means you are better at managing real estate than running that business. Perhaps it would have been better to have just done real estate in the first place.
- jakarta 16y ago
  I don't agree with this kind of singular thinking. Capital should go wherever returns are best. If you have a steel company and you are at the top of the cycle, investing in steel plants or doing acquisitions in the steel space will be a destructive use of capital. Let's say you are Google and you do indeed believe that startup valuations are getting too high to warrant acquisitions. Maybe you pull back and look for other opportunities. You have $33B in cash and 10-years are only yielding ~3%. You're better off redeploying that capital to somewhere that will be truly accretive versus chasing bad deals or sticking in treasuries. Maybe right now the current R&D ideas just aren't appealing either. So you decide to sit tight in that area and go do a real estate deal where you can get a good IRR. Study Henry Singleton, the founder of Teledyne and see how he chose to allocate capital wherever he could get the most value at that particular point in time.
  - ams6110 16y ago
    When you're Google's size the normal rules don't always apply, but I would say that generally any "non-core" investments should at least have some strategic purpose. McDonald's for example, owns or leases huge amounts of real-estate, which they sublease to their franchisees. One reason for this is to maintain control over the franchisees. A franchise owner can't decide to close up and open a Burger King instead, because McDonald's would cancel his lease on the property. I'm not sure how owning real-estate relates to what Google does. They are not a retailer so the physical location of their offices is not critical. Even if a particular opportunity is a "good deal" it's still a distraction from their core business. Even if management and maintenance is subbed out, somebody in Google has to keep an eye on things to some degree.

joubert 16y ago

If you don't buy, you have to rent. They can't have the staff working on the sidewalks of 9th Ave., or on the Highline.

dspeyer 16y ago

There aren't a lot of opportunities. Most ways Google can grow are blocking on things other than money.