Google may have to start spending—fast. Its $9.8 billion in cash and securities means that the U.S. Securities and Exchange Commission technically regards the company as a mutual fund, making it subject to tightened regulations (see Is Google a Mutual Fund?).

If it can’t grab an exemption, as Microsoft did in 1998, analysts say Google could buy companies, expand its infrastructure, buy back its own stock, or even issue a dividend to stockholders. Or it could buy a Toyota Prius for every man, woman, and child in Oakland, California.

“Our only comment is that we hope our application will be approved and if necessary will work with the SEC to address any concerns,” Google representative Jon Murchinson wrote in an email to Red Herring.

Hope, however, is hardly a business plan. David Hallerman, an analyst with eMarketer who follows the search market, said Google would be more likely to expand its infrastructure than spring for a large company, or one that could make a significant dent in its wallet.

“The company’s wealth has been its combination of knowledge and, more and more, having the biggest computing network in the world,” said Mr. Hallerman. “They realize that’s a form of power.”

Acquisition Spree?

Google’s acquisition history shows that the company sticks to smaller companies with asset values in the “tens of millions at most,” said Scott Kessler, an internet equity analyst with Standard & Poor's. “I think they’re going to continue to focus on smaller acquisitions that are predicated on proprietary technology and talented developers and engineers,” he added.

But Mr. Kessler said Google has also been on a tear when it comes to capital investments. “The company is spending very aggressively,” he said. He pointed to the recent purchase of approximately $300 million in real estate that the company could use to expand its Mountain View, California, campus, as an example.

“The company has been asked why those expenditures have not been better managed or controlled,” said Mr. Kessler. “I think that capital expenditures will continue to increase, but I don’t know if it makes sense for the rate of increases to continue to accelerate.”

As for a dividend, Google stockholders shouldn’t hold their breath, said James Corcoran, managing director of Treasury International, a Maryland-based firm that advises companies on corporate finance. “I think that paying a dividend would probably be the last alternative,” he said. “They’re such a young company. The expectation once you pay a dividend is that it will always be there and it will grow.”

The most likely outcome of this problem is that Google will receive its exemption and get the SEC’s blessing to keep investing its money to generate the best returns possible. It’s money that analysts said the company may need to stay ahead at a time when the market for search and other Internet services promises only to become more competitive.

Contact the writer:AWeinstein@RedHerring.com

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