Kudos to Google. I'm happy for them. But it's also worth pointing out that Market Cap is a horrendous way to measure how "valuable" or "powerful" a company is.
Companies A and B both want to raise $10B to fund a new investment opportunity. A decides to issue corporate bonds, because it doesn't want to dilute its shareholders. B decides to issue new equity instead, because they feel that their company stock is actually overvalued at the moment. Net result: A's market cap remains the same. B's market cap increased by $10B. No difference in future projected earnings/revenue between the 2 of them, but B now leads A in market cap.
Another scenario: Companies A and B both made $20B in profits over the past year. Company A decides to keep $5B in the bank, and returns the remaining $15B to their shareholders. Company B hoards all $20B, and doesn't do anything with it besides letting it sit in the bank. Company A's market cap drops by $15B because of their decision to issue dividends, and company B's market cap now leads A, just because they decided to sit on their pile of money.
If you want to judge how powerful a company is, look at its revenue, profits or total assets. If you want to judge how successful a company is, look at its investor returns. Market cap isn't really all that meaningful a metric to judge a company by.
In both cases you describe, the company with the higher cap is the more "powerful" company though. In example one, they have a lot more control of their destiny since they have debt and not more shareholders.
In number two they have more control because if an opportunity comes up that costs say 10 billion, Company B can act on that and Company A cannot.
> In number two they have more control because if an opportunity comes up that costs say 10 billion, Company B can act on that and Company A cannot.
You missed the example completely. Both companies raised $10B, either through debt or equity, and both of them spent/invested the money immediately. Net result: both of them have equal amounts of cash in the bank. But one of them has a market cap $10B higher than the other. Simply because of a tactical choice they made in financing.
There are minor advantages/disadvantages involved in debt vs equity financing. However, these differences are all 2nd order effects. At a macro level, they have remarkably similar financial outcomes. Read up on Modigliani-Miller Theorem if you don't get this concept.
> In both cases you describe, the company with the higher cap is the more "powerful" company though. In example one, they have a lot more control of their destiny since they have debt and not more shareholders.
The company with the higher market cap is the one that raised $10bn using equity and not debt. You could say that the company with more equity has more control of their destiny as it has less debt (equity is owned by the company shareholders, debt is owned by third parties), but this is not what you wrote.
> A decides to issue corporate bonds, because it doesn't want to dilute its shareholders. B decides to issue new equity instead, because they feel that their company stock is actually overvalued at the moment. Net result: A's market cap remains the same. B's market cap increased by $10B. No difference in future projected earnings/revenue between the 2 of them, but B now leads A in market cap.
Er, there is a difference: A added a bunch of future debt-service expense that B didn't; presumably the expansion that each A & B funded has future expected revenue, but A's future expenses cut into that, while B, with equity financing, didn't add expenses. So, B's actual value should be greater than A's, which the market cap in your scenario reflects.
There are good criticism of market cap as value, but yours isn't one of them.
You've overlooked a number of vital points that render your logic false. I could explain it to you, but I doubt you'll believe me. This is a very technical and complicated issue. Google for Modigliani-Miller Theorem. It addresses exactly the fallacy you've described.
Scenario 1: B's existing public equity and future EPS is diluted by the new issue, and the market cap should remain similar.
Scenario 2: A's share price now has a dividend stream implying future returns, which will increase the future value of the shares. Yes, the market cap will drop by $15B on the dividend date, but two similarly performing companies, one paying predictable dividends, and one not, should already be priced differently. I'll concede that the modern practice of just not paying dividends complicates this a bit, and biases the pricing toward pure speculation.
Scenario 1: B's existing public equity and future EPS is diluted by the new issue, and the market cap should remain similar.
This is factually false. Ask anyone with a background in finance and they will tell you so.
Scenario 2: A's share price now has a dividend stream implying future returns, which will increase the future value of the shares.
If companies A and B start off with the exact same market cap, and generate the exact same profits every year, and A keeps paying off the profits in the form of dividends, and B refuses to do so and hoards the profits in its bank account, B's market cap will keep rising further and further ahead of A's market cap. Again, this is a basic financial fact, and anyone with a background in finance will tell you so.
You can also use enterprise value (equity+debt-cash) to solve the two issues you mention. By the way, using that metric Google has been already ahead of Apple in the past.
Companies A and B both want to raise $10B to fund a new investment opportunity. A decides to issue corporate bonds, because it doesn't want to dilute its shareholders. B decides to issue new equity instead, because they feel that their company stock is actually overvalued at the moment. Net result: A's market cap remains the same. B's market cap increased by $10B. No difference in future projected earnings/revenue between the 2 of them, but B now leads A in market cap.
Another scenario: Companies A and B both made $20B in profits over the past year. Company A decides to keep $5B in the bank, and returns the remaining $15B to their shareholders. Company B hoards all $20B, and doesn't do anything with it besides letting it sit in the bank. Company A's market cap drops by $15B because of their decision to issue dividends, and company B's market cap now leads A, just because they decided to sit on their pile of money.
If you want to judge how powerful a company is, look at its revenue, profits or total assets. If you want to judge how successful a company is, look at its investor returns. Market cap isn't really all that meaningful a metric to judge a company by.