Why Google just issued a rare 100-year bond

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Investors are pretty confident that Google’s parent company, Alphabet, will still be a going concern in the year 2126.

When a company needs to raise money, it can generally either sell stocks or sell bonds. This week, Google went the bond route. But the choice to include so-called century bond raised eyebrows for a few reasons.

The tech giant on Tuesday issued an extremely rare corporate bond that matures 100 years from now, part of a multibillion-dollar borrowing spree the company is undertaking to fuel its AI ambitions.

Now, let’s just underline that for a second: Google, a nearly $4 trillion public company with more than $73 billion in free cash flow annually, is turning to debt markets to raise even more money. That’s because even Google’s $126 billion cash on hand starts to look pretty paltry when the company says it plans to double its AI spending this year – to a staggering $185 billion.

Companies don’t typically launch such extremely long-dated bonds because companies don’t tend to last forever. People also don’t tend to live that long or enjoy it much if they do. If you’re a regular investor buying a Google century bond today, you’re not going to be around to see it mature, let alone do much with it. You can’t take it with you, after all.

But century bonds make more sense for institutions like university endowments or governments expected to stick around for generations.

It’s not unheard of for a company to issue them, but it’s not common. And it hasn’t always worked out great for those that have done it.

IBM issued its 100-year bond in 1996, when its dominance of the tech scene wasn’t in question. But almost immediately after, scrappy rivals like Microsoft and Apple came along to chip away at IBM’s market leader status.

Another 90s icon, JC Penney, sold $500 million of its century bonds in 1997, only for those bonds to sell for pennies on the dollar 23 years later, when the retailer filed for bankruptcy. (Bond holders are creditors, so they fare slightly better than equity investors in a bankruptcy, but often only marginally so.)

The last US company to issue this kind of debt was Motorola, in 1997. (For the kids: Motorola made cellphones and pagers. Pagers were these devices that… you know what, just Google it.)

“At the start of 1997, Motorola was a top 25 market cap and top 25 revenue corporation in America,” tweeted investor Michael Burry of “Big Short” fame on Monday. “The Motorola corporate brand in 1997 was ranked #1 in the US, ahead of Microsoft… Today Motorola is the 232nd largest market cap with only $11 billion in sales.”

Motorola is still kicking, and it’s still servicing its debt, meaning bond holders are still getting paid. But the timing of Motorola’s bond issuance, quickly followed by its steady decline, pretty well crushed any remaining appetite for such long-dated corporate debt. The bond itself didn’t cause Motorola’s decline, but the decision to issue it looked like a symptom of classic corporate hubris.

There is a market for these hundo bonds, but it’s not huge. They really only make sense for high-level institutional investors, like life insurance companies and pension funds that have long-term liabilities to cover.

So far, at least, it seems the market is more than willing to extend Alphabet some credit. And by some credit, I mean a boatload: The company raised nearly $32 billion in less than 24 hours, according to Bloomberg, which first reported the 100-year bond offering. Alphabet sold British pound- and Swiss franc-denominated debt Tuesday, following a $20 billion debt sale in the US the day before. The 100-year bond was nearly 10 times “oversubscribed,” meaning investor demand far outstripped supply.

So while the hundo bond is an unusual offering with some ominous historical precedents (particularly in tech), there’s clearly some hunger for it.

“I can understand why the market is eager to lend money to them,” Steve Sosnick, chief strategist at Interactive Brokers, told me. “People are willing to lap up the bonds, because, for the most part, these [Big Tech] companies don’t have a lot of indebtedness, and they do have great earnings power, and they do have great cash flows.”

Google, in particular, has some unique features working in its favor, Sosnick added. Not least: The company has effectively become a government-sanctioned monopoly, following a court ruling last year that said that while Google was violating antitrust laws, it wouldn’t have to fundamentally change its business model.

“If you’re going to lend money to someone for 100 years, a proven monopoly is probably not a bad place to go,” Sosnick said.