GOOGLE

Financial Analysis Report

Prepared for:
Financial Management Class –
Florida Institute of Technology

February 2011

TABLE OF CONTENTS

EXECUTIVE SUMMARY 3

COMPANY INTRODUCTION 4

FINANCIAL ANALYSIS 5

Summary Financial Analysis Report 6

WEIGHTED AVERAGE COST OF CAPITAL (WACC) 10

FUTURE CASH FLOWS 12

ANALYSIS OF CASH FLOWS 13

Sensitivity Analysis of Google’s 2011 Future Cash Flow 14

Sensitivity Graph for Google’s 2011 Future Cash Flow 15

Sensitivity Graph for Google’s 2011 Future Cash Flow 15

Inflation Analysis 15

Google Inc. Discounting Future Cash Flows for Inflation @ 1.7%: 16 Footnotes effect on future cash flows 17

Analysis of Google Competitors 19

ANALYSIS OF CASH FLOWS 20

Footnotes effect of future cash flows 21

Analysis of Google Competitors 23

Major Project “post audit” 24

HISTORICAL STOCK PRICE 26

SECURITY ANALYST’S REPORTS 28

DIVIDEND and CAPITAL STRUCTURE 29

CORPORATE GOVERNANCE 30

MERGER and INTERNATIONAL STRATEGY 32

EXECUTIVE SUMMARY

This report provides a detailed analysis of Google, an Internet search engine, which will offer information in order to make an informed decision as to whether to invest in Google. This report will also provide information regarding debt securities.

The financial report shows that Google is in a stability strategic focus. During the years of 2007 – 2009 their Gross Margin continued in an upward trend. The Net Profit Margin was stable and sales shows that Google is expanding their business. The financial condition ratios show an upward trend as well and the company’s debt ratio is within industry standards. Google does not carry any inventory and therefore remains above the industry’s standards in a Quick Ratio. Google’s financial leverage is also stable. Google has made key acquisitions and therefore, their Return on Equity has remained below the industry average. However, their Return on Equity has far exceeded their Return on Assets which denotes that Google has very good financial leverage. In essence, the company is more focused on increasing its working capital and paying down debts.

The Weighted Average Cost of Capital has remained low at Google and they reported zero debt in 2009. Google’s cost of preferred stock is also zero. By keeping the company’s Weighted Average Cost of capital low, the company created more value. However, in the future if Google decides to add more debt to their capital structure, even more value will be created as long as the cost of debt is lower than the cost of equity.

According to data obtained for an analysis of future cash flows, Google has made good investments and will continue to grow their cash flows while also continuing their edge as the leading Internet search engine. Google is rated as having very aggressive Accounting Governance Risk (“AGR”) which places them in the 5th percentile, higher than 95% of all companies. Therefore, even with an increase in inflation, Google stands strong in continuing their upward gain in their cash flows.
Google controls the highest market share of any competitor at 64% within the search engine business genre. It has also built its capital structure on financial instruments such as cash, cash equivalents, marketable security and cash flow generated from its operations. Google offers Common Stock A, mostly purchased from outside investors and Common Stock B, preferable stock with 10 votes per share. At this time, Google’s founders own about 90% of outstanding Common Stock B. Google’s stock prices have steadily increased and the company has reinvested the profits back into the company for purposes of innovation and strengthening its employees. Google maintains an optimal capital structure without using large amounts of long-term debt to finance its capital expansion projects.

Google’s corporate governance limits most decisions to the stockholders who own a majority of the stock, including the decision to change any directors of the Board. As of December 31, 2009 the founders own approximately 90% of Class B stock and therefore have significant influence over management and all affairs regarding Google. Furthermore, because Google’s employees d are also equity holders, morale is high and Google encourages its employees to feel a part of Google’s success.

In conclusion, Google is a sound investment that according to the analysis will continue to increase their profits and their dominance in the marketplace.

COMPANY INTRODUCTION

In 1998, Stanford University graduates Larry Page and Sergey Brin combined their ingenuity and built a search engine called “BackRub” that evolved into what is now known as Google. Google, with over 150 domains, now functions as a search engine that offers many different products and services including web applications, advertising, sports scores, stock quotes, headlines, addresses, videos, etc. Google’s focus is “to provide useful and relevant information to the millions of people around the world as they rely on us (Google) to provide the answers they are seeking.”

The strategy of focusing on getting information to millions of people internationally is the foundation of Google. Another strategy in which Google is unique is their culture. Google creates an atmosphere of creativity, teamwork and brainstorming which has helped win them a spot in the top 10 of Fortune magazine’s best companies in which to work.

Google offers services such as search advertising, display advertising, mobile advertising, tools for publishers, local business owners, and business enterprise. Search advertising was developed so that advertisers could choose their own key words to solicit search results and they pay only when a customer actually “clicks” on their ads. Display advertising came into affect so that businesses can manage campaigns across different formats. As Google recognizes mobile devices will soon take over PCs, advertisers were offered the ability to run search ad campaigns on mobile devices through specific Google applications. Since advertising can enhance a customer’s opinion, Google offers support and services to build the best and most creative ad campaign. Local businesses can enjoy Google for free by using simple sites such as Google data-bases or they can pay a simple flat-fee for online advertising that high-lights details and key differences from similar businesses elsewhere. Business enterprise grew through the incorporation of email, documents, calendars, and more to make communication easier in the workplace.

Today, more than 3 million businesses use Google Applications. Google’s initial public offering occurred through NASDAQ on August 19, 2004, with their highest percent-to-earnings ratio being 56.2. Larry Page, the co-founder, credits Google’s success by stating “the perfect search engine would understand exactly what you mean and give back exactly what you want.” Page states that Google became the best because they (Google) “were better and faster at finding the right answer than all of the other search engines at the time.” Being the fastest and best search engine certainly comes with challenges as Google’s competition to be the best includes other dynamic corporations such as Apple, Microsoft, Facebook, Amazon.com, Twitter, Yahoo, and Mozilla. Google currently employs over 20,000 people. Although the corporate home is in Mountain View, California, there are offices all over the world. In dealing with this amount of employees, there are some issues that can become major factors when computer information is involved. Because of this, Google has to be sure to have control over such areas as fraud and security issues, market share data, search failure rates, and business trends.

Another important part of Google is their philosophy which includes: focus on the user and all else will follow; it is best to do one thing really, really well; you can make money without doing evil; the need for information crosses all boarders; and great just isn’t good enough. In addition, according to an industry overview, Google is one of Dow Jones Global Titans, #30 in the FT Global 500, #102 in Fortune 500 and is considered the “leading Internet search engine.”

FINANCIAL ANALYSIS

| 2008 | 2009 | Sales | $ 21,795,550,000 | $ 23,650,563,000 | Net Income | $ 4,226,858,000 | $ 6,520,448,000 | Total Assets | $ 31,767,575,000 | $ 40,496,778,000 | Common Equity = shareholders' equity - preferred equity | Common Equity | $ 28,238,862,000 | $ 36,004,224,000 | | | | | Operating Profit Margin Ratio | Profit Margin = Net Income / Sales | | 2008 | 2009 | Net Income | $ 4,226,858,000 | $ 6,520,448,000 | divided by Sales | $ 21,795,550,000 | $ 23,650,563,000 | Profit Margin | 19.4% | 27.6% | | | | | Assets Turnover Ratio | Total Assets turnover = Sales / Total Assets | | 2008 | 2009 | Sales | $ 21,795,550,000 | $ 23,650,563,000 | divided by total assets | $ 31,767,575,000 | $ 40,496,778,000 | Total Assets Turnover | 0.69 | 0.58 | | | | | Equity Multiplier | Equity Multiplier = Total assets / Common equity | | 2008 | 2009 | Total Assets | $ 31,767,575,000 | $ 40,496,778,000 | divided by common equity | $ 28,238,862,000 | $ 36,004,224,000 | Equity Multiplier | 1.12 | 1.12 | | | | | ROA | ROA = profit margin x total assets turnover | | 2008 | 2009 | Profit Margin | 19.4% | 27.6% | times Total Assets Turnover | 0.69 | 0.58 | ROA | 13.3% | 16.1% | | | | | ROE | ROE = ROA x Equity Multiplier | | 2008 | 2009 | ROA | 13.3% | 16.1% | times Equity Multiplier | 1.12 | 1.12 | ROE | 15.0% | 18.1% | | | | |

Summary Financial Analysis Report

Profit Margin % | Answers how well the business performed. | GoogleTwo Years Prior | GoogleOne Year Prior | Google | Industry | S&P 500 | Gross Margin | Gross Profit /Total Revenue | 59.93 | 60.44 | 62.08 | 65.0 | 38.0 | Pre-Tax Margin | Operating Income / Total Revenue | 34.19 | 26.86 | 35.93 | 34.1 | 16.9 | Net Profit Margin | Net Income /Total Revenue | 25.33 | 19.39 | 27.95 | 27.3 | 12.3 | Sales | Financial Statement | $16,593.99 | $21,795.55 | $23,325.86 | Not required | Not required | Operating Income | Financial Statement | $5,084.40 | $6,631.97 | $7,987.48 | Not required | Not required | Operating Cash Flows | Financial Statement | $5,172.58 | $5,726.75 | $8,044.76 | Not required | Not required | Profitability :Based on the numbers provided above it is evident that Google is in a stability strategic focus. Notice how the Gross Margin for 2009, 2008 and 2007 (62.08, 60.44, 59.93) are trending upward. For the most part Google gross margin was below the industry standard, but above S&P 500. Looking at Newell Rubbermaid sales for 2009, 2008 and 2007, sales are trending upward. The Net Profit Margin was stable, over a three year period; all of its fiscal years were over the S&P 500 net margin of 12.3. Examining Google Annual Report, the focus is more on growing the business, which is reflective in its sales over a three year period. |

Financial Condition | Signals ability to take on additional debt and liquidity. | Google Two Years Prior | Google One Year Prior | Google | Industry | S&P 500 | Debt/ Equity Ratio | (Total Liabilities – Current Liabilities)/ Total equity | 0.03 | 0.04 | 0.04 | 0.05 | 0.99 | Current Ratio | Current assets /Current liabilities | 8.49 | 8.77 | 10.62 | 3.9 | 1.2 | Quick Ratio | (Cash and Short Term Investments + Short Term Investments + Total Receivables, Net) / Current Liabilities | 8.12 | 8.03 | 10.12 | 0.1 | 0.8 | Interest Coverage | Data not readily available | * | * | NA | -0.8 | 39.6 | Financial Condition Google current ratio for the last three years has been trending upward, which indicates a company that has liquidity and is credit worthy to acquire new debt if necessary. This is quite remarkable considering that Google sales depends heavily on advertising. Google debt equity ratio has remained stable and is closely to the industry standard, which means Google can meet its debt obligations. Quick Ratio was well above the Industry and S&P 500 standards, due to Google not having any inventory. Overall Newell Rubbermaid, financial condition picture is on target to remaining stable and is in line with the CEO’s goals. Google financial leverage is stable. |

Investment Return % | Signals performance for managers and owners. | Google Two Years Prior | Google One Year Prior | Google | Industry | S&P 500 | Return On Equity | Net Income /Total Equity | 21.16 | 16.60 | 20.30 | 23.3 | 20.5 | Return On Assets | Net Income /Total Assets | 19.21 | 14.81 | 18.11 | 18.0 | 7.3 | Return On Equity (5-Year Avg.) | | Not required | Not required | 20.1 | 20.2 | 14.9 | Return On Assets (5-Year Avg.) | | Not required | Not required | 17.7 | 17.0 | 7.2 | Investment Return Google’s Return On Equity has been below the industry averaged, mostly to due key Acquisitions. Return on Assets was above industry average except for one year; this could be blamed on worldwide economic conditions. The good is ROE far exceeded ROA, which means Google has very good financial leverage. Google is more focused on increasing its working capital and paying down debts. |

Management Efficiency | Signals how well the company was run by management. | Google Two Years Prior | Google One Year Prior | Google | Industry | S&P 500 | Income/Employee | | Not required | Not required | 348,566 | 253,986 | 78,351 | Revenue/Employee | | Not required | Not required | 1,000,000 | 892,809 | 696,883 | Receivable Turnover | Total Revenue /Average Accounts Receivable - Trade, Net | 9.14 | 8.81 | 7.9 | 11.1 | 13.9 | | Average is defined: (beginning of the year + end of the year) / 2 | Inventory Turnover | Cost of Revenue, Total / Average Total Inventory | NA | NA | NA | 0.3 | 9.1 | Asset Turnover | Total Revenue / Average Total Assets | 0.66 | 0.69 | 0.58 | 0.6 | 0.7 | Management Efficiency Asset turnover over the three year periods has remained constant or stable, indications that Google does not waste the uses of its assets. In addition, the figures above shows that Google is not spending lavishly on capital assets. Concerning Income per Employee and Revenue per Employee, Newell Rubbermaid seems to trend well above the Industry, but with S&P 500 the numbers are incredibly lower. |

The financial report shows that Google is in a stability strategic focus. During the years of 2007 – 2009 their Gross Margin continued in an upward trend. The Net Profit Margin was stable and sales shows that Google is expanding their business. The financial condition ratios show an upward trend as well and the company’s debt ratio is within industry standards. Google does not carry any inventory and therefore remains above the industry’s standards in a Quick Ratio. Google’s financial leverage is also stable. Google has made key acquisitions and therefore, their Return on Equity has remained below the industry average. However, their Return on Equity has far exceeded their Return on Assets which denotes that Google has very good financial leverage. In essence, the company is more focused on increasing its working capital and paying down debts.

WEIGHTED AVERAGE COST OF CAPITAL (WACC)

CAPM Risk-free rate | 4.4% | | | Market risk premium | 6.0% | | | Beta | | 0.85 | | | | | | | | rs = | rRF | + | (RPM) | (bi) | rs = | 4.4% | + | 6.0% | 0.85 | rs = | 4.4% | + | 5.1% | | rs = | 9.50% | | | | Beta (truncated for space) Stock Return Data for Google and the S&P 500 Index 2009 | Month | Market Level
(S&P 500 Index) at Month End | Market's
Return | Google's Adjusted Stock Price Daily | Google's
Return | 12/31/2009 | 1115.1 | -1.0% | 619.98 | -0.4% | 1/2/2009 | 931.8 | NA | 321.32 | NA | | | | | | Description of Data | | | | | Correlation between Google and the market: | | 0.77 | Beta: bGE = GE,M (GE / M) | | | | 0.85 | | | | | | Beta (using the SLOPE function): | | | 0.85 | Intercept (using the INTERCEPT function): | | 0.00 | R2 (using the RSQ function): | | | 0.59 | * Google’s cost of preferred stock is zero. Google has not transferred any of its stock to preferred. * Google’s cost of debt for 2009 was zero. No bonds were issued during this period. * wd = target weight debt = 0; wps= target weight preferred stock = 0; ws = target weight common equity = 1.0 WACC Calculation WACC = wdrd(1-T) + wpsrps + wsrs WACC = wsrs WACC = (1.0)(0.0950) WACC = 9.50 %

Has Google minimized its WACC? The lower a company’s WACC the better. By lowering a company’s WACC more value is created because of the resulting increased spread between it and the ROIC. It is the opinion of the group that Google can do things to further minimize its WACC. In 2009, Google was reporting zero debt. One way for them to further minimize their WACC would be to take on some debt. Increasing debt also increases a company’s risk of bankruptcy but it may also lower a company’s WACC. Google must be careful in ensuring that the cost of debt they take on be less than the cost of equity. Is the current WACC appropriate for future use by the company? Google has survived using their current WACC. They were founded in 1998 and went public in 2004. They are obviously doing something right. You cannot turn around with coming in contact with something Google. Can more be done to make the company better? The answer is absolutely. Our financial analysis for 2009 points to Google adding more debt to their capital structure. By adding more debt they will actually add value to their company and minimize their WACC.

FUTURE CASH FLOWS

INCREMENTAL STATEMENT OF CASH FLOWS | Avg Change over the past 3 years | PERIOD ENDING | 31-Dec-13 | 31-Dec-12 | 31-Dec-11 | | Net Income | $ 14,922,213 | $ 12,783,142 | $ 10,644,071 | $ 2,139,071 | | | | | | Operating Activities, Cash Flows Provided By or Used In | | | | | Depreciation | $ 1,240,170 | $ 1,292,113 | $ 1,344,057 | $ (51,944) | Adjustments To Net Income | $ 499,180 | $ 759,120 | $ 1,019,060 | $ (259,940) | Changes In Accounts Receivables | $ (2,320,804) | $ (1,923,536) | $ (1,526,268) | $ (397,268) | Changes In Liabilities | $ 3,080,799 | $ 2,501,199 | $ 1,921,600 | $ 579,600 | Changes In Inventories | | | | | Changes In Other Operating Activities | $ (1,498,343) | $ (1,102,895) | $ (707,448) | $ (395,448) | Total Cash Flow From Operating Activities | $ 15,923,215 | $ 14,309,143 | $ 12,695,072 | | | | | | | Investing Activities, Cash Flows Provided By or Used In | | | | | Capital Expenditures | $ (6,507,309) | $ (5,677,539) | $ (4,847,770) | $ (829,770) | Investments | $ (7,928,500) | $ (7,728,500) | $ (7,528,500) | $ (7,528,500) | Other Cash flows from Investing Activities | $ 8,215,449 | $ 5,908,299 | $ 3,601,150 | $ 2,307,150 | Total Cash Flows From Investing Activities | $ (6,220,360) | $ (7,497,740) | $ (8,775,120) | | | | | | | Financing Activities, Cash Flows Provided By or Used In | | | | | Dividends Paid | $ - | $ - | $ - | $ - | Sale Purchase of Stock | $ (1,895,219) | $ (1,530,479) | $ (1,165,740) | $ (364,740) | Net Borrowings | $ 8,657,500 | $ 6,926,000 | $ 5,194,500 | $ 1,731,500 | Other Cash Flows from Financing Activities | $ 496,368 | $ 428,912 | $ 361,456 | $ 67,456 | Total Cash Flows From Financing Activities | $ 7,258,650 | $ 5,824,433 | $ 4,390,217 | | Effect Of Exchange Rate Changes | $ 21,385 | $ 7,923 | $ (5,539) | $ 13,462 | Change In Cash and Cash Equivalents | $ 16,982,889 | $ 12,643,759 | $ 8,304,630 | |

The market value of equity for Google Inc. was obtainable, because Google does not have any outstanding shares. As 02/24/11, Google’s current stock price was $611.32. The Future price per share for Google Inc. common stock was not obtainable, because of the same reason.

The above Incremental Statement of Future Cash Flows is of Google Inc for the next 3 years. The past 3 years Google Inc has been on a steady claim into the top competitor in their Industry. Since the economic crisis in 2007 – 2008, Google has started investing more. Google’s smart investing has continued through 2010. By doing so, it has given Google the edge in their Industry and becoming the leading Internet search engine.

The 3 year projections that are seen in Google’s Incremental Statement of Future Cash Flows was done by taking the average of the past 3 years and applying the average to each year’s totals. The reason for doing the estimated projections this way is because as stated before, Google has taken action, since the economic crisis, and is looking into the future and making wise choices in their investments.

ANALYSIS OF CASH FLOWS

Google operates the leading Internet search engine, offering targeted search results from billions of Web pages. Results are based on a proprietary algorithm -- Google's technology for ranking Web pages is called PageRank. The company generates nearly all of its revenue ($29,321,000,000 in 2010) through ad sales. Advertisers can deliver relevant ads targeted to search queries or Web content. The Google Network is a network of third-party customers that use Google's ad programs to deliver relevant ads to their own sites. Google subsidiaries include YouTube and DoubleClick. Through these programs, Google managed to have a 24% sales growth resulting in a net income of $8,505,000,000. This is an increase from the amount of $6,520,000,000 in 2009. (1)
Google was able to achieve these results by introducing Nexus One, the program used on Android cellular devices that allow the user to upload all file types, including large graphics files, RAW photos, ZIP archives and more to the cloud through Google Docs, giving one place where a user can upload and access key files online. There was the introduction of Google Buzz, the online chat system; acquiring Aardvark, a network contract company; Google Earth, Google Places, and Google Maps were introduced in March. Caffeine, the new indexing system was introduced along with Google Apps for Government. Google continued to make strides by making, their first direct investment in a utility-scale renewable energy project, part of the corporation’s efforts to accelerate the deployment of renewable energy. The incorporation of these programs/assets allowed Google to increase their current assets from $20,178,182,000 in 2008 to $41,562,000,000 by the end of the year 2010. (2)
Google, Inc. has achieved and maintains success in the same manner that it maintains an index of web sites and other content, and makes this information freely available to anyone with an Internet connection. In 2010, the corporation ranks number 120 in Forbes top 200 performers, a jump from the number 155 spot. (3)
Along with this ranking, Google Inc. is currently rated as having Very Aggressive Accounting & Governance Risk (AGR). This places them in the 5th percentile among all companies, indicating higher Accounting & Governance Risk (AGR) than 95% of companies. AGR scores are based on statistical analysis of accounting and governance risk factors. Lower scores indicate heightened corporate integrity risk, indicating an increased likelihood of future class action litigation, material financial restatements or impaired equity performance. (4)

(1) http://www.dailyfinance.com/quotes/google-inc/goog/nas/historical-prices (2) http://www.google.com/corporate/history.html#2010 (3) http://finapps.forbes.com/finapps/jsp/finance/compinfo/CIAtAGlance.jsp?tkr=GOOG#scroll (4) http://finapps.forbes.com/finapps/AccountingRisk.do?tkr=GOOG

Sensitivity Analysis of Google’s 2011 Future Cash Flow

The What-If Analysis that was used in Google’s Inc. Future Cash Flow is Sensitivity Analysis. Sensitivity analysis was completed because it will provide the Analyst the measure of percentage change in Net Present Value (NPV) that results from a given percentage change in an input variable when other inputs are held at their expected values.
The expected values were taken from the 2011 Incremental Statement of Future Cash Flows shown earlier in the report. By using the Google’s 2010 WACC, the investments in 2011 and the Future Cash Flow for the next 3 years, the NPV was calculated to be approximately $24.8 billion. This calculation of NPV provided the base for the sensitivity analysis. A plus or minus 30% deviation was used in the sensitivity analysis, which provided good in sight on the what-if’s of 5 selected inputs. The 5 selected inputs that were chosen are the following: Changes in Liabilities, Capital Expenditures, Net Income, WACC and Net Borrowings. The inputs individual data totals can be seen below.

2011 Evaluation | WACC | 9.50% | Projected Investment in 2011 | $ (7,528,500) | NPV | $24,851,274 |

Deviation from Base | Changes in Liabilities | NPV | | | $24,851,274 | -30% | $ 1,345,120 | $ 23,404,941 | 0 | $ 1,921,600 | $ 24,851,275 | 30% | $ 2,498,080 | $ 26,297,610 | | | | Deviation from Base | Capital Expenditures | NPV | | | $24,851,274 | -30% | $ (3,393,439) | $ 28,500,054 | 0 | $ (4,847,770) | $ 24,851,273 | 30% | $ (6,302,101) | $ 21,202,492 | | | | Deviation from Base | Net Income | NPV | | | $24,851,274 | -30% | $ 7,450,850 | $ 16,839,779 | 0 | $ 10,644,071 | $ 24,851,274 | 30% | $ 13,837,292 | $ 32,862,769 | | | | Deviation from Base | WACC | NPV | | | $24,851,274 | -30% | 6.65% | $ 26,357,611 | 0 | 9.50% | $ 24,851,274 | 30% | 12.35% | $ 23,460,379 | | | | Deviation from Base | Net Borrowings | NPV | | | $24,851,274 | -30% | $ 3,636,150 | $ 20,941,519 | 0 | $ 5,194,500 | $ 24,851,274 | 30% | $ 6,752,850 | $ 28,761,029 |

As can be seen in Google’s sensitivity analysis’ of the 2011 Future Cash Flow, the slopes of the lines in the graph below and the ranges in the inputs table above show how sensitive NPV is to each input. Google’s Net Income has the largest range and the steepest slope, causing it to be the most sensitive input to NPV. The NPV was fairly sensitive to changes in Capital Expenditures and Net Borrowings; and not especially sensitive to changes in the Liabilities and WACC.
If Google’s management calculates their future cash flow for 2011 as done in this report, they need to try really hard to obtain accurate estimates for Net Income. The reason is because the Net Income has the greatest impact on the NPV, which is the most risky input.

Sensitivity Graph for Google’s 2011 Future Cash Flow

Sensitivity Graph for Google’s 2011 Future Cash Flow

Inflation Analysis

The Federal Reserve predicts inflation rate of 1.3 to 1.7% for 2011 and 1.0 to 1.9% 2012. The Federal Open Market Committee indicated that the persistence of large margins of slack in resource utilization should contribute to relatively low rates of inflation over the forecast horizon. In addition, participants noted that appropriate monetary policy, combined with stable longer-run inflation expectations, should help keep inflation in check. (1) http://www.federalreserve.gov/monetarypolicy/fomcminutes20110126ep.htm Google Inc. Discounting Future Cash Flows for Inflation @ 1.7%:

INCREMENTAL STATEMENT OF CASH FLOWS with INFLATION (in thousands) | PERIOD ENDING | 31-Dec-13 | 31-Dec-12 | 31-Dec-11 | Net Income | $14,922,213 | $12,783,142 | $10,644,071 | | | | | Operating Activities, Cash Flows Provided By or Used In | | | | Depreciation | $ 1,240,170 | $ 1,292,113 | $ 1,344,057 | Adjustments To Net Income | $ 499,180 | $ 759,120 | $ 1,019,060 | Changes In Accounts Receivables | $ (2,320,804) | $ (1,923,536) | $ (1,526,268) | Changes In Liabilities | $ 3,080,799 | $ 2,501,199 | $ 1,921,600 | Changes In Inventories | $ - | $ - | $ - | Changes In Other Operating Activities | $ (1,498,343) | $ (1,102,895) | $ (707,448) | Total Cash Flow From Operating Activities | $15,923,215 | $14,309,143 | $12,695,072 | | | | | Investing Activities, Cash Flows Provided By or Used In | | | | Capital Expenditures | $ (6,507,309) | $ (5,677,539) | $ (4,847,770) | Investments | $ (7,928,500) | $ (7,728,500) | $ (7,528,500) | Other Cash flows from Investing Activities | $ 8,215,449 | $ 5,908,299 | $ 3,601,150 | Total Cash Flows From Investing Activities | $ (6,220,360) | $ (7,497,740) | $ (8,775,120) | | | | | Financing Activities, Cash Flows Provided By or Used In | | | | Dividends Paid | $ - | $ - | $ - | Sale Purchase of Stock | $ (1,895,219) | $ (1,530,479) | $ (1,165,740) | Net Borrowings | $ 8,657,500 | $ 6,926,000 | $ 5,194,500 | Other Cash Flows from Financing Activities | $ 496,368 | $ 428,912 | $ 361,456 | Total Cash Flows From Financing Activities | $ 7,258,650 | $ 5,824,433 | $ 4,390,217 | Effect Of Exchange Rate Changes | $ 21,385 | $ 7,923 | $ (5,539) | Change In Cash and Cash Equivalents | $16,982,889 | $12,643,759 | $ 8,304,630 | | | | | Inflation (1.7%) | $ 288,709 | $ 214,944 | $ 141,179 | Cash Flow | $16,694,179 | $12,428,815 | $ 8,163,451 |

Footnotes effect on future cash flows

Footnotes were identified in Google’s financial statements as “Notes to Consolidated Financial Statements” and used for analysis of impact on future cash flow discussed below.

Revenue Recognition – Google recognizes as revenues the fees charged advertisers each time a user clicks on one of the text-based ads that are displayed next to the search results pages on the website or on the search results pages or content pages of the Google Network members’ websites and, for those advertisers who use Google’s cost-per impression pricing, the fees charged advertisers each time an ad is displayed on the members’ websites. Google reports AdSense revenues on a gross basis principally because they are the primary obligor to their advertisers. Google also generates fees from advertising management services, online advertising, online shopping payment programs, licensing of Search Appliance products, which include hardware, software, and post-contract support.

Cost of Revenues - Cost of revenues includes the expenses associated with the operation of data centers, including depreciation, labor, energy, bandwidth costs, credit card and other transaction fees related to processing customer transactions including Google Checkout transactions, amortization of acquired intangible assets, as well as content acquisition costs. These fees that the sites generate are shared with the network ad providers as well as Google Network members.

Accounts Receivables – Google does not charge interest to its accounts receivables. The corporation constantly monitors the credit-worthiness of substantial accounts and determines if business relationships will continue.

Property and Equipment - Property and equipment are accounted for at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally two to five years. Buildings are depreciated over periods up to 25 years. Leasehold improvements are amortized over the shorter of the remaining lease term or the estimated useful lives of the assets. Construction in progress is related to the construction or development of property (including land) and equipment that have not yet been placed in service for their intended use. Depreciation for equipment commences once it is placed in service and depreciation for buildings and leasehold improvements commences once they are ready for their intended use. Land is not depreciated.

Software Development Costs – Software development costs are expensed. The costs incurred are determined during the technological production are determined and expensed through each product.

Income taxes – These are recognized under the liability method. We recognize income taxes under the liability method. Deferred income taxes are recognized for differences between the financial reporting and tax bases of assets and liabilities at enacted statutory tax rates in effect for the years in which differences are expected to reverse.

Foreign Currency – Currency of international subsidiaries are transferred to U.S. dollars for all accounting statements. This is done using month-end exchange rates. Gains and losses are recognized as other income for stockholder’s equity. Google recorded $36 million of net losses in 2008, $8 million of net gains in 2009, and $29 million of net losses in 2010.

Stockholder’s Equity – The Board of Directors has authorized 100,000,000 shares of convertible preferred stock, $0.001 par value, issuable in series. At December 31, 2009 and 2010, there were no shares issued or outstanding.

Fair Value Hedges - In November 2009, Google began using forward contracts designated as fair value hedges to hedge foreign currency risks for investments denominated in currencies other than the U.S. dollar. Gains and losses on these contracts are recognized in interest and other income, net, along with the offsetting losses and gains of the related hedged items. Google exclude changes in the time value for forward contracts from the assessment of hedge effectiveness and recognize them in interest and other income, net. The notional principal of foreign exchange contracts to purchase U.S. dollars with foreign currencies was $37 million and $787 million at December 31, 2009 and 2010.

http://investor.google.com/documents/2008_google_annual_report.html

Analysis of Google Competitors

Google controls approximately 64% of the market share within the search engine landscape business. There are mixed opinions on percentage rates of the other top search engines, Yahoo and Microsoft. Currently, it is thought that Yahoo is the next largest competitor with 17.4% of the market and Microsoft controls 11.1%. (1) Apple follows behind with a market share of 6.4%

Yahoo provides direct competition for Google in a variety of products such as email, Messenger, news, search, and analytic services. Yahoo also helps users find travel deals and compare product prices. Yahoo recently added Twitter to its search page and if additional joint advertising deals take place between Yahoo and Microsoft, it could prove costly for Google. (2)

Microsoft has enhanced its Bing search engine and improved much of its IT services to the public. With these improvements, they will have a strong pull on much of the consumer population that Google serves. In response to Microsoft, Google has unleashed their real-time search engines and made an attempt to undercut Microsoft in their products and their office web applications.

Although Apple’s market share is small in comparison, the company may be one of Google’s biggest rivals by the end of 2011. Apple’s iTunes was the No 1 music retailer in United States in 2009. Further, Google’s Android will have tough time as Apple’s iPhones continues to grab hold of the market all round the globe. (2)

(1) http://news.cnet.com/8301-1023_3-20016795-93.html (2) http://technology.globalthoughtz.com/index.php/10-toughest-competitors-of-google-in-2010/

Direct Competitor Comparison | | Google | Yahoo | Microsoft | Apple | Revenue | $ 29,321,000 | $ 1,731,977 | $ 62,484,000 | $ 36,537,000 | Market Cap | 195.75B | 21.47B | 224.93B | 315.89B | Net Income | $ 8,505,000 | $ 605,289 | $ 24,098,000 | $ 5,704,000 | EPS | 26.31 | 0.90 | 2.34 | 17.92 | P/E | 23.14 | 18.19 | 11.43 | 19.13 | |

ANALYSIS OF CASH FLOWS

Google operates the leading Internet search engine, offering targeted search results from billions of Web pages. Results are based on a proprietary algorithm -- Google's technology for ranking Web pages is called PageRank. The company generates nearly all of its revenue ($29,321,000,000 in 2010) through ad sales. Advertisers can deliver relevant ads targeted to search queries or Web content. The Google Network is a network of third-party customers that use Google's ad programs to deliver relevant ads to their own sites. Google subsidiaries include YouTube and DoubleClick. Through these programs, Google managed to have a 24% sales growth resulting in a net income of $8,505,000,000. This is an increase from the amount of $6,520,000,000 in 2009. (1)

Google was able to achieve these results by introducing Nexus One, the program used on Android cellular devices that allow the user to upload all file types, including large graphics files, RAW photos, ZIP archives and more to the cloud through Google Docs, giving one place where a user can upload and access key files online. There was the introduction of Google Buzz, the online chat system; acquiring Aardvark, a network contract company; Google Earth, Google Places, and Google Maps were introduced in March. Caffeine, the new indexing system was introduced along with Google Apps for Government. Google continued to make strides by making, their first direct investment in a utility-scale renewable energy project, part of the corporation’s efforts to accelerate the deployment of renewable energy. The incorporation of these programs/assets allowed Google to increase their current assets from $20,178,182,000 in 2008 to $41,562,000,000 by the end of the year 2010. (2)

Google, Inc. has achieved and maintains success in the same manner that it maintains an index of web sites and other content, and makes this information freely available to anyone with an Internet connection. In 2010, the corporation ranks number 120 in Forbes top 200 performers, a jump from the number 155 spot. (3)

Along with this ranking, Google Inc. is currently rated as having Very Aggressive Accounting & Governance Risk (AGR). This places them in the 5th percentile among all companies, indicating higher Accounting & Governance Risk (AGR) than 95% of companies. AGR scores are based on statistical analysis of accounting and governance risk factors. Lower scores indicate heightened corporate integrity risk, indicating an increased likelihood of future class action litigation, material financial restatements or impaired equity performance. (4)

http://www.dailyfinance.com/quotes/google-inc/goog/nas/historical-prices http://www.google.com/corporate/history.html#2010 http://finapps.forbes.com/finapps/jsp/finance/compinfo/CIAtAGlance.jsp?tkr=GOOG#scroll http://finapps.forbes.com/finapps/AccountingRisk.do?tkr=GOOG Major Project “post audit”

Google's new Android 3.0 Honeycomb operating system is designed for larger screen sizes than the current Android hand-held systems. Along with the larger size, Honeycomb uses a truly virtual and holographic interface. “Honeycomb features refined multi-tasking, elegant notifications, access to over 100,000 apps on Android Market, home screen customization with a new 3D experience and redesigned widgets that are richer and more interactive. Honeycomb also features the latest Google Mobile innovations including Google Maps 5 with 3D interactions and offline reliability, access to over 3 million Google eBooks, and Google Talk, which now allows video and voice chat with any other Google Talk enabled device (PC, tablet, etc).” (1)

Honeycomb is Google’s response to Apple’s iPad and it has the ability to come out on top if it will consider five key elements: easy interface, access to Adobe flash, camera capacity, access to a dual-core processor, and an easy to understand filing arrangement. All of these would make the Honeycomb a success because Apple struggles with maintaining all of them and many of Apple’s apps have a tendency to crash. (2)

Honeycomb was introduced at the Google corporate office on February 2, 2011. The abilities of the Honeycomb are outlined as follows:

* Ability to choose fragments which let developers break up components of an app into different pane. * All 2D Drawing that developers have been doing can be hardware accelerated * Developers can also tap into an animation framework, allowing developers to fluidly move between views. * RenderScript: A new rendering engine optimized for high performance 3D graphics. * Google Body: The Google Maps for human anatomy (this launched out of labs a couple months ago, now is apparently getting an Android app). * Gaming that can be ported from the PS3 to Android tablet. 3d graphics look solid — about on par with a PS2 game. * New camera application. New UI for the tablet interface. Supports video chat, with image stabilization built in (this also helps with limited bandwidth). (3)
Current Price for the Honeycomb tablet known as the Motorola Xoom: $600.00 – WiFi version, 3G version (has pending 4G upgrade) is $800.

The operating system of Honeycomb itself is free.

Because the Honeycomb operating system was introduced into the public domain on February 17, 2011, there has not been enough information available to determine the success of the product. According to tech sources, the system is destined for success. This will be true as long as Google continues to maintain their nearly immediate response to operating system challenges. (1) http://www.pcmag.com/article2/0,2817,2380862,00.asp (2) http://www.pcworld.com/article/218376/5_ways_googles_honeycomb_tablet_os_could_beat_apples_mighty_

ipad.html
(3) http://techcrunch.com/2011/02/02/live-from-googles-android-honeycomb-event/
HISTORICAL STOCK PRICE

Since stock should reflect the intrinsic value of the company, it is usually a good indicator as to the value of the firm and operating potential, i.e. maximum capability to generate profit. But reports indicate Google Inc. stock is undervalued. Based on Google Inc. future cash flow, using a discounted cash flow model, Google Inc. may well be quite undervalued, as of February 2011.
Reviewing the historical stock prices, an investor presumes an ability to know what will occur in the future. This is essentially impossible but one can use the ‘average’ return across a company or the market to gauge an approximation of what a company value should be. In addition to historical stock prices, an investor should understand recent developments at the companies they’re interested in and must be aware of the global economic changes that occurred especially when considering a multi-national firm.

I believe, Google’s historical stock prices indicate the fluctuation in the general economy due to the 2007 - 2008 subprime worldwide crisis, 2010 news of CEO Eric Schmidt stepping down, increased competition, and Google’s introduction of new technologies. Google took action to strengthen their financial position because the cash projection forecasts were substantially lower than expected, due to worldwide crisis. Google started investing into their future. In 2009 Google Inc invested approximately $7 billion and in 2010 their investments all most reached $8 billion. Their investments in 2009 lead into a 19% increase in Revenue from 2009 to 2010. Their cash flow drop in 2009 in reduction of 40%.
Specifically, these additional investments new technologies included: * Chromium OS: Google stepped in the operating system competition with Microsoft and Apple; * Google Wave: Google demonstrated their new real-time collaboration webapp; * Android 2.0/Droid: Google released many Android only applications to boost their moble platform and took on the iPhone in its “Droid Does” ad campaign; (1)
Introduction of new technologies in 2009 enabled the firm to regain a strengthened position in the marketplace into 2009.
The historical stock prices influenced the cash flow projections only for a baseline of what to expect. The majority of information that was used for the cash flow projections indicated the continuing research and development and additional investments in new technologies, i.e. fixed assets and additional required working capital.

Reviewing historical stock prices below indicate Google Inc. was successful in the 2009-2010 timeframe because of their investments in new technologies. Google Inc Yearly Stock Prices | Date | Open | High | Low | Close | Volume | Change (%) | 31-Dec-10 | 596.74 | 598.42 | 592.03 | 593.97 | 1,539,300 | -4.2% | 31-Dec-09 | 624.75 | 625.40 | 619.98 | 619.98 | 1,219,800 | 101.5% | 31-Dec-08 | 304.20 | 311.00 | 302.61 | 307.65 | 2,886,800 | -55.5% | 31-Dec-07 | 698.57 | 702.49 | 690.58 | 691.48 | 2,376,200 | 50.2% |

Google Inc Quarterly Stock Prices | Date | Open | High | Low | Close | Volume | Change (%) | 31-Dec-10 | 596.74 | 598.42 | 592.03 | 593.97 | 1,539,300 | 13.0% | 30-Sep-10 | 529.16 | 531.87 | 518.92 | 525.79 | 3,244,100 | 18.2% | 30-Jun-10 | 454.96 | 457.83 | 444.72 | 444.95 | 3,603,200 | -21.5% | 31-Mar-10 | 565.05 | 569.74 | 562.81 | 567.12 | 3,030,800 | -8.5% | 31-Dec-09 | 624.75 | 625.40 | 619.98 | 619.98 | 1,219,800 | 25.0% | 30-Sep-09 | 500.00 | 500.14 | 487.24 | 495.85 | 3,141,700 | 17.6% | 30-Jun-09 | 424.00 | 427.21 | 418.22 | 421.59 | 2,593,900 | 21.1% | 31-Mar-09 | 348.93 | 353.51 | 346.18 | 348.06 | 3,655,300 | 13.1% | 31-Dec-08 | 304.20 | 311.00 | 302.61 | 307.65 | 2,886,800 | -23.2% | 30-Sep-08 | 395.98 | 425.08 | 392.32 | 400.52 | 3,086,300 | -23.9% | 30-Jun-08 | 532.47 | 538.00 | 523.06 | 526.42 | 3,765,300 | 19.5% | 31-Mar-08 | 435.64 | 442.69 | 432.01 | 440.47 | 4,446,400 | -36.3% | 31-Dec-07 | 698.57 | 702.49 | 690.58 | 691.48 | 2,376,200 | 21.9% |

(1) http://lifehacker.com/#!5427816/this-year-in-google-the-2009-edition

SECURITY ANALYST’S REPORTS

In evaluating the security analyst’s reports, the current 30-day analysis from 43 analysts reporting state that investors should buy Google stocks. The mean analyst consensus is 1.767. (1)

As Google continues to flourish with ideas including the current Honeycomb product following in the foot-steps of Android, the company continues to see profits sky-rocket. These products allow Google to dominate in the area of mobile advertising at great lengths over the other mobile devices because both of these products give Google an advertising monopoly. All applications on both Android and Honeycomb function only with Google. Google’s market share is over 60% more than all of the others combined. (2)

Given the information available on Google stocks, we agree that it is a good time to buy. Although it is understood that an investor should never rely solely on a security analyst report to make a stock-buying decision, Google has had positive successes and numbers across many different project areas. The corporation also shows strong trends for the future. (3)

(1) http://www.dailyfinance.com/earnings/google-inc/goog/nas/analyst-recommendations (2) http://searchengineland.com/picturing-googles-dominance-of-mobile-advertising-65114 (3) http://www.finra.org/Investors/SmartInvesting/AdvancedInvesting/UnderstandingSecuritiesAnalystRecommendations/

DIVIDEND and CAPITAL STRUCTURE

Google currently does not pay any cash dividend on its common stock. Also, Google says it expects not to pay any dividends in the foreseeable future. Google, financial mindset of not offering cash dividends in my opinion is appropriate. The founders of the Google seem to be focused on in staying in an innovative flow. Not paying cash dividends allows for reinvestment of earnings and allows Google to have enough funds for R & D projects, without resorting to cost savings that could cripple the company. Also, with Google being in the Internet Search engine business, Google must have enough financial leverage to make quick decision, especially when the world of information technology is growing at a rapid rate. Google capital structure is built upon many financial instruments such as cash, cash equivalents, marketable securities and cash flow generated from its operations. Google currently leases approximately 1.6 million square feet of office space and 56 acres of undeveloped land around its headquarters located in Mountain View, California. Also, Google owns 2.6 million square feet of buildings and approximately seven acres of developable land for future growth. Google has leased facilities internationally that it maintains as well. Google offers dual common stock (Common Stock A and Common Stock B), Common Stock A is mostly the stock that is purchased from outside investors, and Common Stock B is preferable stock in nature with more voting rights, 10 votes per share. Currently, the founders of Google owned about 90% of outstanding Common Stock B. Google mostly relies on internal equity in terms of its capital expenditures. Google capital structure is efficient because the company stock prices have been steadily increasing and the reinvestment of its profits into the company for innovation purposes and to strengthening its employees. Google is maintaining an optimal capital structure without using enormous amounts of long-term debt to finance its capital expansion projects. Does your company have a substantial degree of informational asymmetry (assets which are hard for outsiders to value)? Do you think this affects the capital structure of your company? Google has investments in agency mortgage backed securities of over 1.5 million dollars for 2009. Theses investments are hard to understand since the US economy was in a recession during 2007 thru 2009.

CORPORATE GOVERNANCE

Google’s corporate governance is made of the following as stated below:

• Google certificate of incorporation provides for a dual class common stock structure. As a result of this structure, Google founders, executives, and employees have significant influence over all matters requiring stockholder approval, including the election of directors and significant corporate transactions, such as a merger or other sale of Google or its assets. This concentrated control could discourage others from initiating any potential merger, takeover, or other change of control transaction that other stockholders may view as beneficial.

• Google board of directors has the right to elect directors to fill a vacancy created by the expansion of the board of directors or the resignation, death, or removal of a director, which prevents stockholders from being able to fill vacancies on Google board of directors.

• Google stockholders may not act by written consent. As a result, a holder, or holders, controlling a majority of Google capital stock would not be able to take certain actions without holding a stockholders’ meeting. • Google certificate of incorporation prohibits cumulative voting in the election of directors. This limits the ability of minority stockholders to elect director candidates.

• Stockholders must provide advance notice to nominate individuals for election to the board of directors or to propose matters that can be acted upon at a stockholders’ meeting. These provisions may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of Google. • Google board of directors may issue, without stockholder approval, shares of undesignated preferred stock.

Google management is doing an excellent job in maintaining its corporate profile and its board of directors are focused on ensuring Google remains profitable.

The ability to issue undesignated preferred stock makes it possible for our board of directors to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to acquire Google. Google Class B common stock has 10 votes per share and Google Class A common stock has one vote per share. As of December 31, 2009, Google founders, executive officers, and directors (and their affiliates) together owned shares of Class A common stock, Class B common stock, and other equity interests representing approximately 70% of the voting power of Google outstanding capital stock. As of December 31, 2009, Google two founders CEO, Larry Sergey, and Eric, owned approximately 90% of Google outstanding Class B common stock, representing approximately 68% of the voting power of Google outstanding capital stock. Larry Sergey and Eric therefore have significant influence over management and affairs and over all matters requiring stockholder approval, including the election of directors and significant corporate transactions, such as a merger or other sale of Google or its assets, for the foreseeable future. All of Google’s employees are also equity holders, with significant collective employee ownership. Google form of ownership by its employees increases morale and empowers its employees to feel a part of Google’s success.

MERGER and INTERNATIONAL STRATEGY