What should tech companies like Google, Apple, Microsoft and Intel do with all of their cash….Acquisitions? Dividends? Stock repurchases?

By: ispeculatornew
Date posted: 06.16.2010 (4:11 am) | Write a Comment  (5 Comments)

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In the technology sector, there are many types of companies. Some are high growth corporations that require a lot of capital to fund all of their new and existing projects. But some other companies have more stable environments and have been generating a lot more cash than they are able to spend. These companies are piling up money so quickly that it has become an issue. Google even had to open a trading floor to better manage its quickly growing pile of money. It’s no secret, companies like Microsoft, Apple & Google have been making many acquisitions in the past few months and will likely be doing so for a long time. But they have been small and not even enough to for the companies to slow down the cash that keeps piling up. At some point, investors will ask that these companies make better use of their cash holdings. Why? There are many reasons but in general companies that hold too much cash tend to exhibit some problems and might not be as efficient.

Just how much cash do these companies hold?

There is no clear way to determine this but a good way to do estimates is to look at “Cash and Short Term assets” and take out any “Short Term Liabilities”. Here is a graph that shows you just how much cash these companies currently hold…

As you can see, none of these companies will lack liquidity anytime soon. And no, of course, none of them would have any problems raising capital if needed.

What options are available

When dealing with such huge amounts, there are not that many solutions, here are the main ones:

-Initiate Dividend Payments or increase the existing ones
-Major acquisition
-Stock repurchases
-Internal Projects
-Keep hoarding cash

In this post we will look into the four alternatives and will also be sending an email to our mailing list later this week concerning the company out of Apple or Google that we think will be the first one to initiate dividend payments.

Initiate Dividend Payments or Increase existing ones

It would certainly seem like a logical way to do things. If a company makes more money than it can spend every quarter for years and years, giving some back to investors would certainly seem like a good way to do deal with the problem. In general, investors prefer having money in their pockets rather than in the bank account of the companies they own. One of the main advantages here is that it would help a company like Google resolve the future imbalance without having much impact on its current cash holdings.

Out the 4 companies, Intel and Microsoft pay out dividends while Google and Apple do not currently do so….

The main disadvantage though is that generally dividend payments are seen as a sign that high growth is over and any of these companies would be battling that perception if it went ahead with dividend payments. Why? Because the perception is that a company will only pay out dividends if it does not have any other high growth potential projects in mind. That of course is not a good sign. But at what point is there too much money going around? If a company like Microsoft wants to start major projects, what are the odds those will cost $30 billions…?

Later this week in our newsletter, we will be discussing which one of two non dividend paying stocks (Google and Apple) is more likely to start paying a dividend, you can sign up to get it here:

Major Acquisitions

One quick way to use cash of course is to go buy shopping. I’m not talking about those small $50 million companies but rather the real deal. If Microsoft went ahead and purchased Yahoo or Facebook, then that would have a very significant impact on its cash levels. Such high profile deals are not easy to try though and It is even more difficult to make such deals work. But I would think that the main reason why these companies keep so much cash is to be ready if the right opportunity comes around.

Google has been very active in acquisitions but has not been around to make a big deal like buying Twitter or Facebook to finally have a decent presence in the social web. For individuals, getting a cash advance is not that difficult, and it is even more true for these 4 giants.

Stock Repurchase

This is another method for companies to use extra cash. It does have side benefits. Usually, when a company buys back its shares, it is because it estimates that they are undervalued by the market. Initiating such a program thus sends a very positive signal to the market and can increase the value of the company.

Internal Projects

I think Microsoft is a prime example of a company spending loads of money into a money losing project in order to gain market share and hopefully gain a viable business out of it. Microsoft’s Online Operations have been bleeding cash for months and months with no end in sight. Why? Because honestly, it is not what this is about. Microsoft is spending money and energy trying to get Bing in the global search picture, it does not care much about profitability at this point and I am one of those that think this could work out well. Google had such an amazing lead that it seemed almost impossible to catch up. But thanks to very solid product and billions spent in countless different ways to promote and get the name out there, Bing looks like a solid second and a possible contender. That would not have been possible without the strong cash position of Microsoft and the billions coming out of its other product lines. In a way, the Xbox was started in a similar way, looking like it had no shot against Sony’s Playstation. But years later, Xbox is now a profitable and promising division for Microsoft… will Bing become the same?

Doing nothing at all….

Unfortunately for all the investors of these companies, the most likely outcomes is this one, that Intel, Microsoft, Google and Microsoft will keep piling up cash with no end in sight. At some point, holding $40-50 billion might even look normal… sadly, managers of these companies usually prefer having a few more zero’s in their bank account just in case… while we shareholders get a diminished return out of it….

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5 Comments

  1. Comment by Craig — June 16, 2010 @ 6:27 pm

    I don’t think giving dividends is a good option. They would create an expectation from the market.

    I would like to see them investing in acquisitions or new technologies.

  2. Comment by IS — June 16, 2010 @ 7:54 pm

    @Craig – Yes, I see your point. There is no doubt that once you do start paying dividends, investors expect to have them coming till the end of time;)

  3. Comment by Panda Mike — June 17, 2010 @ 4:30 am

    On the other side, having dividend would definitely increase the amount of investor interested in their stocks. Technically, when a company has a lot of cash in its hand and doesn’t know what to do with it, they are better off returning it to the investors…

  4. Comment by Gumby — June 17, 2010 @ 1:14 pm

    Donate to Social Security..

  5. […] a fact, many tech companies currently have loads of cash at their disposition and despite some investors asking to get that cash back, companies like Google […]

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