Tech companies are hanging onto record amounts of cash, and industry watchers want to see more of it reinvested in the companies or distributed to shareholders.
FactSet, a financial research firm, tallied all the cash and marketable securities held by the S&P 500, excluding companies in the financials sector. Collectively, these non-finance companies reported $1.29 trillion in cash and short-term investments at the end of the first quarter, a gain of 7.8 percent compared to year-earlier numbers.
All that cash isn’t distributed equally, of course, and tech stalwarts are among the biggest hoarders. FactSet named the top 10 cash-rich companies, and half of them are in the tech industry: Microsoft, Google, Cisco, Apple and Oracle. Combined, these five tech companies held $245 billion in cash at the end of March – which is 19 percent of the $1.29 trillion total.
(“Cash,” for the purposes of this article, refers to the sum of cash, cash equivalents, and short-term investments in marketable securities, which can easily be converted into cash. Long-term investments aren’t counted.)
Both cash ratios (cash as a percentage of assets) and cash levels have been going up in U.S. corporations in general — and tech companies in particular — over the past several years, says Nikhil Varaiya, director of graduate programs and professor in the finance department at San Diego State University. “Current operating cash flows are higher than their current investment needs, so cash is beginning to pile up.”
Young companies, generally speaking, need cash to fuel their growth. As companies mature and growth slows, cash begins to accumulate. In the U.S. tech sector, a handful of big companies have been raking in the cash in recent years.
• Microsoft’s cash and short-term investments add up to $77 billion as of June 30. That total includes $3.8 billion in cash and cash equivalents, and $73.2 billion in short-term investments. Microsoft’s cash pile has been growing steadily since the end of 2008, when it totaled $20 billion.
• Google is sitting on $16.16 billion in cash and cash equivalents and $38.27 billion in marketable securities. Save for a dip in mid-2012, Google’s cash pile has been expanding for the last several years, climbing from nearly $16 billion in late 2008 to more than $54.4 billion today.
• Cisco’s balance sheet is flush with cash. It has $7.9 billion in cash and cash equivalents and $42.7 billion in investments, for a total of $50.6 billion. That’s more than double the $24.4 billion it had five years ago.
• Apple’s cash stash is legendary. At the end of June, Apple reported $11.2 billion in cash and cash equivalents, plus $31.4 billion in short-term marketable securities, for a total of $42.6 billion. (The more eye-popping number is the additional $104 billion Apple has in long-term marketable securities, which isn’t counted in this tally because long-term investments aren’t easily converted into cash.)
• Oracle’s cash pile is up to $32.2 billion, which includes $14.6 billion in cash and cash equivalents, and $17.6 billion in marketable securities.
There’s pressure on tech companies to spend that cash — to make strategic acquisitions and to return some of it to shareholders in the form of dividends (cash paid to stockholders) and stock buybacks (which reduce the overall share count, effectively increasing the value of the shares that remain).
“You can try to find new avenues to deploy the cash. You can look at new markets. Another possibility is to acquire companies that, presumably, will help you maintain your growth,” Varaiya says of cash-rich companies’ options. “And, of course, you can return cash to your shareholders by increasing dividends, or by paying dividends if you’ve never paid them before, or by buying back stock.”
In recent years, a few tech giants have succumbed to that pressure and begun paying dividends.
Oracle initiated a dividend in 2009, and Cisco paid its first ever dividend in 2011. Apple reinstated its dividend in mid-2012. At the same time, Dell began paying quarterly dividends to shareholders. Most recently, storage vendor NetApp initiated a quarterly dividend in May of this year, followed by EMC, which paid its first quarterly cash dividend in July.
Stock buybacks are another way to create value for shareholders.
During the last three fiscal years, Microsoft spent $20 billion of its cash on stock repurchases ($4.6 billion in 2013, $4 billion in 2012, and $11.5 billion in 2011.) Cisco has also been a big share repurchaser over the last decade, spending $78.9 billion on buybacks since the inception of its stock repurchase program in 2001.
Earlier this year Oracle’s board authorized an additional $12 billion in stock buybacks; Qualcomm hiked its share buyback program to $5 billion; EMC increased its program from $1 billion to $6 billion; and IBM added $5 billion to its repurchasing plans.
Besting them all is Apple, which announced a massive $60 billion stock buyback plan in April. It’s the largest stock repurchase in history.
To buy or not to buy
While tech companies have been paying out dividends in record numbers and stock buybacks are booming, not all of tech’s biggest names are on board.
Google remains a holdout. It doesn’t pay a dividend and it’s not buying back stock.
Yahoo, too, has so far resisted pressure to pay a dividend, though it did launch a $5 billion share buyback program in 2012. The company has said it’s holding onto cash so it can make more acquisitions (during the second quarter, Yahoo bought nine companies, including Tumblr).
In the big picture, M&A activity in the tech sector has been disappointingly low during the first half of 2013. Cash-rich balance sheets have positioned the industry for a surge in deal-making — but industry watchers are still waiting for that surge to occur.
During the second quarter, the U.S. economy showed positive momentum, stock markets continued to climb, and IPO activity rose — yet the volume of technology deals dropped precipitously, according to PricewaterhouseCoopers.
Just 32 deals closed in the second quarter, a decline of 22 percent compared with 41 deals closed in the first quarter, PwC said in its quarterly report on M&A activity in the tech sector. On the positive side, the value of second quarter deals climbed 34 percent to $13.9 billion compared to $10.4 billion in the first quarter. But compared with the second quarter of 2012, deal volume and value decreased are still down sharply – 46 percent and 58 percent, respectively.
“After technology deal volume reached a four-year low in the first quarter of 2013, the second quarter proved equally disappointing as volumes dipped again sharply and value recovered only slightly,” PwC stated.
Still, there were five billion-dollar transactions that closed during the second quarter: Yahoo’s $1.1 billion acquisition of Tumblr; Google’s estimated $1.1 billion deal for Waze; Priceline.com’s $1.8 billion acquisition of KAYAK Software; a Berkshire Partners-led $2.0 billion acquisition of Lightower Fiber Networks; and ASML Holding’s $3.7 billion deal for laser maker Cymer.
Increasing confidence in the economy, a rising stock market, and rumors of impending tech transactions have PwC bullish on future M&A deal activity.
“With piles of unused corporate cash, increased momentum among private equity buyers, technology companies determined to fully embrace cloud and capture an increased share of mobile consumers, and executives eager to identify new avenues to fuel growth engines, technology deals may be down, but certainly not out,” the firm wrote. “Recent deal announcements will help invigorate M&A in the technology industry in the latter half of 2013.”
How much is too much?
Meanwhile, investors would like to see tech companies spend more of their rising cash holdings, and they’re getting noisier about it.
“You’re seeing pressure from investors because all of that cash, sitting, is not earning anywhere close to what someone would think is the cost of equity capital for these companies,” SDSU’s Varaiya says. “This cash definitely lowers their returns.”
ValueAct and other investors are reportedly pressing for Microsoft to return more cash to its shareholders, for instance. Prior to unveiling its $60 billion stock buyback plan, Apple had been under pressure from investors, including David Einhorn of Greenlight Capital, to use its cash to reward shareholders.
Disagreement about optimal corporate cash holdings is nothing new, asserts Laurie Simon Hodrick, a visiting scholar at Stanford Institute for Economic Policy Research and Stanford Graduate School of Business.
Holding cash gives companies financial flexibility in times of heightened uncertainty — and there’s plenty of that today, Hodrick wrote in a brief titled, “Are U.S. Firms Really Holding Too Much Cash?”
“Firms choose their optimal cash holding in response to existing market challenges. These currently include 1) an uncertain economic environment following the financial crisis, 2) an uncertain fiscal environment, including ongoing debates about the corporate tax structure and the federal government budget, and 3) an uncertain monetary environment, including challenges to the sustainability of historically low interest rates as the Federal Reserve discontinues its quantitative easing policies,” Hodrick wrote.
“If the economy continues to recover and uncertainty about future growth rates and fiscal and monetary policies declines, the option value of holding cash will decline. If heightened uncertainty continues, however, these firms will continue to hold high cash levels.”