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Richest Tech Firms & the Challenge of Managing Huge Cash Hoards

Cash and short-term securities at four of the world's biggest high-tech companies have surged sharply over the last year, boosting their combined market valuation and offering them ammunition for strategic acquisitions, R&D, and product development programs.

{complink 379|Apple Inc.}, {complink 1131|Cisco Systems Inc.}, {complink 2294|Google}, and {complink 3426|Microsoft Corp.} together had approximately $149.1 billion in cash, short- and long-term securities, and other liquid assets (net of long-term debts) at the end of their latest quarters. This is up 30 percent from $115 billion in the comparable periods of 2009 and dwarfs the foreign exchange reserves of many small countries.

By far, Apple is the King of the Hill in my compilation of the Top 4 cash-rich companies. The huge success of Apple's iPhone wireless handset equipment, iPod digital music players, and the iPad, the latest offering in the tablet PC category, combined with continued market share gain by Mac computers, has turned the company into a giant cash geyser. In the September quarter, Apple reported a total of $53.3 billion in cash, short- and long-term marketable securities, and other assets, up a whopping 42 percent, or $15.7 billion, from the same period in 2009.

If Apple continues to penetrate deeper into the consumer electronic market with strong products like the iPhone, the company could close the ongoing fiscal year, ending September 2011, with more than $60 billion in liquid and semi-liquid assets, putting it well ahead of any rivals and giving it the resources to make acquisitions, bankroll extensive research and development operations in new markets, and create opportunities that its closest rivals can only dream about.

Analyst Brian Marshall of Gleacher & Co. estimated Apple's net cash position at the end of its latest quarter at $51 billion and says the company's “cash balance represents about 18% of the market capitalization.” To cap it, Apple has zero debt on its balance sheet, putting it in a distinct class alongside Google, the company that is now shaping up as its archrival in the wireless handset market.

In second place on my list of the high-tech cash kings is Google, the browser and online advertising giant that is quietly branching into other technology areas and testing next-generation applications like driverless vehicle equipment. Google, which also recently reported September-quarter results, had $33.4 billion in net cash and marketable securities, slightly edging out Microsoft's $32 billion in net cash (after taking out long-term debt of $4.9 billion). In fourth place was Cisco, which closed its July 31 fiscal quarter with $42.7 billion in cash and marketable securities but posted $12.2 billion in long-term debts for a net cash position of $30.5 billion.

Even good news comes with its own wrinkles, however. The giant cash pile at these four companies also represents a major challenge: what to do with a truckload of liquid assets at a time interest rates worldwide are at their lowest levels in years. Some have suggested strategic purchases of rivals, technologies, patents, and expansionary spending, but even these options can create, not only value-generating opportunities, but significant challenges. Valuations have risen sharply on Wall Street in the last year, and finding the right acquisition targets, integrating them, and squeezing out cost-savings may be tricky.

Perhaps that's why the four companies reviewed here have kept a large chunk of their cash in dry powder form, investing in short-term and long-term marketable securities, meaning treasury bonds, high-value corporate bonds, and other fairly liquid assets. Google, for instance, had $22 billion, or more than two-thirds of its liquid resources, in short-term investments. Apple had $14 billion in short-term investments and $25.4 billion in long-term investments, a clear indication the company is not going to be tapping a majority of the funds for acquisitions or any other quick-hit transactions.

Of course, these companies could return some of the investments to shareholders in the form of large dividend payments or share buyback. That is not Apple's way; the company does not pay dividends or buy back shares. Microsoft, on the other hand, might be more inclined to raise dividends, but even this is questionable.

With Apple pulling away from other tech leaders, and Microsoft intending to pour money into the fight for dominance in the operating systems market for wireless handsets, a large portion of cash at these companies will be on their balance sheets for some time.

What do you think cash-rich tech companies should do with their money?

9 comments on “Richest Tech Firms & the Challenge of Managing Huge Cash Hoards

  1. DataCrunch
    October 22, 2010

    Hi Bolaji,

    On a personal level and as an investor in technology companies, I would like to see some bigger returns in the form of increased dividends.  As an entrepreneur, I would like to see these companies invest more in start-ups, as these innovative start-ups is where most likely the next big thing will incubate from.  Apple and Google at the moment still have significant momentum, but after a while they will become predictable solid and stable companies, much like Microsoft is today.  Microsoft continues to beat analyst estimates quarter after quarter, year after year, but the stock has stayed in the same trading range for years.  All of these cash rich companies will have to spend some of their billions to continue to innovate and continue to produce the WOW factor in order to keep moving the dial on their stocks. 

     

  2. bolaji ojo
    October 22, 2010

    Dave, It's fascinating how sometimes history repeats itself again and again. The issue of Microsoft that you brought up is a good example. The company still controls a huge portion of its market and is trying hard to expand into other sectors but it's stock price no longer reflects this. In many investors' mind, Microsoft is a matured company despite the billions in cash it still spins off each year. Investors are right, though. Apple's revenue, on a fiscal basis, ($65 billion for the year ended Sept. 30) has now exceeded Microsoft's fiscal sales ($63 billion for the year ended June 30.) It's not Apple to Apple comparisons but the picture is quite clear: Apple is growing faster than Microsoft.

    What you pointed out remains valid, however. Apple and Google may be on a roll now but they could as easily look in a few years like Microsoft if they do not effectively deploy the cash they are generating today.

  3. DataCrunch
    October 22, 2010

    Exactly Bolaji!  Although it is not a bad thing to end up like Microsoft.  What I can't understand is how the market is not that impressed anymore with a company like Microsoft.  Just look at the news this week on the Windows 7 OS, in which Microsoft sold 240 Million copies in the first year.  And yet, the company’s stock continues to trade in the same range. Those are enviable numbers for any company. 

  4. Ariella
    October 23, 2010

    what to do with a truckload of liquid assets at a time interest rates worldwide are at their lowest levels in years.”  That is an excellent question, for individual investors as well as companies.  Given the state of the economy, the desire to shy away from higher risk investments is understandable.  However, the rewards of safe investments are very low indeed, with interest rates hovering around 1 to 2% — lower than the standard rate of inflation, which means that your money is actually losing value with such a low return.

  5. itguyphil
    October 25, 2010

    Dave,

    Although the Windows 7 numbers impress, I think most consumers and/or investors are waiting to see Microsoft excel in some other space before buying into the hype. If they can succeed at, say, Windows Phone 7, then I think it will be a more viable stock buy.

  6. Anna Young
    October 25, 2010

    It comes down to perception and right now Microsoft is not looking peachy. The company will certainly need to be successful in areas considered high-growth before the market will boost its valuation again. This is not impossible, though. Apple is smelling real sweet right now but only 10 years ago the company was looking like road kill. It was losing market share in the computer market and its operating system had barely 5 percent representation in the sector. It's taken years to turn Apple around and now its near-death experience has been forgotten. Microsoft can turn itself around. That's a possibility but the company will have to do more than tweak some other company's idea to change its fortune.

  7. itguyphil
    October 27, 2010

    Anna,

    Anything is possible with the right focus. I was reading this article by departing exec Ray Ozzie (I can't for the life of me find it now to link to) where he pointed out that Microsoft's focus is on too many things. He said if they buckle down and pinpoint the few areas that they want to dominate, they will be a force to be reckoned with. I'd be willing to bet in this case they'd have no problems handling the loads of cash that would be coming their way.

  8. Ashu001
    November 1, 2010

    Bolaji,

    This is a great post!!

    Answering your question of what Companies should do with their huge cash hoards,my question in the case of Apple and Google is this-

    “Do your or my opinions matter to the people running these companies?”

    If they did I would have said use the Cash to pay-out one-time Special Dividends to loyal shareholders.At a time,when most Americans are suffering financially and are forced to cut spending because they are either uncertain in their jobs or have seen their salaries cut sharply;any small investor holding stock in either of these companies would see a welcome boost in their annual income.Who knows,it might even end up boosting these companies as those people turn around and buy Android enabled phones or Iphones!!!

    This is by the way the No.1 Reason why I don't own either of these two companies-I prefer IBM for their much steadier and reliable Dividends.

    In the case of Apple,the net effect of all that cash on the balance sheet has been to enrich Steve Jobs a hundred times over again and again.Through the granting of Stock options which he excercises and dumps hundreds/thousands of shares on the market at a go,making Millions and cumulatively making retail investors poorer in the process.

    But coming back to my initial question.Our opinion means nothing to these guys.They will do as they please and so should we.

    Best Regards

    Ashish.

     

  9. Ashu001
    November 1, 2010

    Bolaji,

    I recently came across these articles which made me mad.At the sametime,the IRS is going after every small Business and citizen to ensure they pay their “fair share of Tax”. The Big boys of the tech world like Google are payingonly 2.4% in Taxes !!!

    How about making pay their fair share of taxes first,then raise taxes on the middle-classs by repealing Bush tax cuts???

    http://www.bloomberg.com/news/2010-10-21/google-2-4-rate-shows-how-60-billion-u-s-revenue-lost-to-tax-loopholes.html

    http://www.businessweek.com/technology/google-tax-cut/google-terminal.html

    I think its more than ironic that these companies exist (like in Google's case) because of taxpayer money(which started the whole thing at Stanford) and now they refuse to pay their fair-share of Taxes.

    Its time the US Govt played Hard-ball with them and forced them to cough up more cash if they want to do business in America.

    Regards

    Ashish.

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