Investors appear quite confident that Google’s parent company, Alphabet, will still be an active entity in the year 2126.
When a corporation seeks to raise capital, its typical options are either issuing equity or taking on debt. This week, Google opted for the debt route. However, the decision to include so-called century bonds has raised eyebrows for several reasons.
On Tuesday, the tech titan floated an exceedingly rare corporate bond that matures in 100 years—part of a multi-billion dollar borrowing spree aimed at funding its artificial intelligence aspirations.
Now, let’s pause for a moment: Google, a publicly traded firm boasting revenues nearing $4 trillion and annual free cash flow exceeding $73 billion, is turning to the debt markets to secure even more funding. This is because even Google’s $126 billion in cash starts looking somewhat modest when the company announces plans to double its AI expenditures this year, pushing them to an astounding $185 billion.
Century Bonds Are Very Uncommon
Corporations generally avoid issuing such ultra-long-term bonds because companies typically don’t last forever. People, too, usually don’t live long enough to enjoy the fruits of such longevity. If you are an average retail investor buying a Google century bond today, you won’t live long enough to see it mature, let alone do anything with it. You certainly can’t take it with you.
But hundred-year bonds make more sense for entities like university endowments or governments, which are expected to endure across generations.
It’s not unheard of for a company to issue them, but it’s far from routine. And those who have done so haven’t always fared well.
The Hubris Factor
IBM issued its 100-year bond back in 1996 when its dominance in the tech landscape seemed unassailable. Yet, almost immediately, fierce rivals like Microsoft and Apple emerged, progressively eroding IBM’s market leadership.
Another titan of the 90s, JC Penney, sold its $500 million century bond in 1997, but those bonds were trading for pennies on the dollar 23 years later when the retailer filed for bankruptcy. (Bondholders are creditors, so they fare somewhat better than equity holders in bankruptcy, but often only marginally so.)
The last US company to issue such debt was Motorola, also in 1997. (For the younger readers: Motorola used to make cell phones and pagers. Pagers were devices that… you know what, just Google it.)
“In early 1997 Motorola was a top-25 market cap and a top-25 revenue generator in America,” tweeted investor Michael Burry, famous for “The Big Short.” “Motorola’s corporate brand ranked #1 in the US in 1997, ahead of Microsoft… Today Motorola ranks 232nd by market cap with sales of only $11 billion.”
Motorola is still operating and servicing its debt, meaning bondholders are still getting paid. But the timing of Motorola’s issuance, followed by its steady decline, effectively suffocated any remaining appetite for such protracted corporate debt. The bond itself didn’t cause Motorola’s downfall, but the decision to issue it felt symptomatic of classic corporate overconfidence.
It’s a Relatively Niche Market
There is a market for these century bonds, but it isn’t vast. They truly only make sense for elite institutional investors, such as life insurance firms and pension funds, which have long-term liabilities to cover.
For now at least, the market seems more than willing to lend to Alphabet. And by “willing,” I mean tremendously so: the company hauled in nearly $32 billion in less than 24 hours, according to Bloomberg, which first broke the news of the 100-year bond placement. Alphabet sold debt in the UK sterling and Swiss franc on Tuesday, following up on $20 billion worth of debt issuance in the US the day before. The 100-year bond tranche was almost 10 times “oversubscribed,” signifying that investor demand far outstripped the supply available.
So, while century bonds are an unusual offering with some grim historical context (especially in the tech sector), there is evidently significant interest in them.
“I understand why the market is keen to give them money,” Steve Sosnick, Chief Strategist at Interactive Brokers, told me. “People are willing to soak up the bonds because, fundamentally, these [mega-cap tech] companies carry very little debt, boast excellent earnings, and generate stellar cash flows.”
Google, in particular, possesses unique characteristics working in its favor, Sosnick added. Not least among them: the company has essentially become a state-sanctioned monopoly following a court ruling last year which determined that although Google violates antitrust laws, it will not be forced to fundamentally alter its operational model.
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