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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.

by 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.
  - qq66 16y ago
    Jeez. How far we've come. Whatever happened to writing a dividend check and letting shareholders buy real estate themselves if they want?
c1utch 16y ago
Sounds a lot like Yahoo! under Carol Bartz. Slash R&D and face the consequences 3+ years later.
- jakarta 16y ago
  In this case the consequence was a larger competitor came along and purchased the company at a premium. Some businesses are just too dysfunctional to survive. This company was plagued with leadership issues (CEO/founder had been forced out because of bad board members, new CEO had 0 industry experience and was utterly incompetent) plus because of the cash flow problem, geography, and loss of key customers, the company just could not afford to go out and beef up the R&D staff. So the next best thing was to replace a couple of the bad board members, cut costs, clean up operations, make the company profitable, and then shop it around.

by jakarta 16y ago

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.
- qq66 16y ago
  Jeez. How far we've come. Whatever happened to writing a dividend check and letting shareholders buy real estate themselves if they want?

c1utch 16y ago

Sounds a lot like Yahoo! under Carol Bartz. Slash R&D and face the consequences 3+ years later.

jakarta 16y ago
In this case the consequence was a larger competitor came along and purchased the company at a premium. Some businesses are just too dysfunctional to survive. This company was plagued with leadership issues (CEO/founder had been forced out because of bad board members, new CEO had 0 industry experience and was utterly incompetent) plus because of the cash flow problem, geography, and loss of key customers, the company just could not afford to go out and beef up the R&D staff. So the next best thing was to replace a couple of the bad board members, cut costs, clean up operations, make the company profitable, and then shop it around.