How does a company decide among common stock, corporate bonds, and bank debt to raise needed capital? How does this process work for for large, Internet-based technology companies like Alibaba, Amazon, and Google?

A company decides among common stock, corporate bonds, and bank debt to raise needed capital by weighing the cost, both short-term and in the long run. Rather than issuing new stock, large firms are resorting more and more to share buybacks.

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Generally speaking, companies will weigh the cost and assess the sustainability of different sources of capital. Rather than issuing new equity, firms, in general, are buying back trillions of dollars worth of their stock. Amazon announced a $5 billion buyback program in 2016, although it has not followed through by repurchasing any stock, and the company's number of total shares outstanding has remained the same over the last several years. This also applies to Alphabet, Google's parent company. However, Google announced in the summer of 2019 that it will buy back $25 billion of its stock. Unlike the two aforementioned companies, Alibaba has relied on issuing equity to bolster its finances with an initial public offering in New York and, more recently, a listing on the Hong Kong stock exchange. The company announced its intention to buy back $6 billion worth of shares in 2018.

Regarding bond-based financing, Alphabet has a handful of bonds in circulation, but their face value at around 4 billion dollars is modest when the ratio of this debt category to its market float is compared to other big technology firms. Amazon has resorted to issuing corporate debt to a much larger degree, having sold $13.7 billion worth of paper to finance acquisitions in 2017 alone. That same year, Alibaba issued 7 billion dollars worth of dollar-denominated bonds. Selling bonds, rather issuing new equity in the form of stock, appears to be these three firm's preferred option when they require additional capital for acquisitions or other activities.

None of these companies have substantial bank debt. All three have high rates of cash flow and substantial amounts of cash on hand and thus no need to resort to comparatively expensive lines of credit.

Company boards have defended their stock buybacks on the grounds that it is a more effective and flexible method to reward their shareholders than paying dividends. Until recently, when restrictions were lifted, buybacks have also been an alternative to companies incurring large tax penalties by repatriating the vast sums of money they have accumulated outside the US. However, they have increasingly been criticized for the large payouts they award to company executives who are remunerated with blocks of shares and options. Buybacks can also offset falling share prices due to faltering corporate performance.

Last Updated by eNotes Editorial on May 6, 2020
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