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Sunday August 4, 2:53 pm Eastern Time
Reuters Market News
Tech Firms Swimming in Cash
By Duncan Martell
SAN FRANCISCO (Reuters) - The technology industry may be slogging through its worst
slump ever but many of the biggest names aren't hurting for cash.
In fact, they're swimming in the stuff.
So the question facing companies and investors is what to do with all that money. The options, experts say, are actually rather
limited -- buy another company, buy back shares, boost research and development spending or increase dividends. But the
good thing in the interim is that all that cash is helping to keep their battered shares from falling even more, and could be enticing
to investors.
Take Microsoft Corp. (NasdaqNM:MSFT - News), for example. The
No. 1 software company is a cash-generating machine, with $38.7 billion
in cash and short-term investments, more than Ford, ChevronTexaco and
Wal-Mart combined.
Shareholders may soon start asking for some of it back. After all, spending
on information technology has been lackluster, the stock market has
sagged, and some of the biggest names in technology, such as Intel Corp.,
are seeing their markets mature.
"We're past the point where we have the unlimited faith of investors," says
Henry Asher, president of New York-based money management firm
Northstar Group, which owns Cisco, Intel, Microsoft, Oracle and other
tech stocks.
In addition to Microsoft, Cisco Systems Inc. (NasdaqNM:CSCO - News), the biggest computer networking gear maker,
boasts $21 billion in cash and investments, Intel (NasdaqNM:INTC - News) has $8.96 billion and database powerhouse
Oracle Corp. (NasdaqNM:ORCL - News) has $5.84 billion.
"Particularly Intel, Microsoft and perhaps Oracle will be at the head of the list to increase payouts to shareholders," Asher says.
Even though their stocks are down and earnings have been under pressure, the biggest tech firms are no slouches when it
comes to generating cash from their core businesses, ranking with huge oil companies, pharmaceutical and consumer goods
firms.
A PERENNIAL QUESTION
Sure, a company can also boost research and development budgets. But it is possible to spend too much.
Already, Microsoft has earmarked $5.3 billion for research and development in its fiscal year ended June 2003 -- 17 percent
of its projected revenue of $32 billion. But it could easily fund that through the billion dollars a month its Windows and Office
software pull in.
"I can't imagine that if you disgorged all the cash they had, that they couldn't protect the Windows franchise entirely and,
probably, with the cash that rolls in, grow the company nicely," Asher says.
Technology companies could start paying dividends -- Microsoft never has -- or they could boost those dividend payouts.
Intel, for instance, pays a quarterly dividend of 2 cents a share, equal to a dividend yield of 0.43 percent.
"I think it's entirely conceivable that some time in the next few years more and more stockholders are going to be saying, 'Let's
get some dividends,"' says Jay Ritter, Cordell professor of finance at the University of Florida in Gainesville.
"You've got this massive cash hoard and you're no longer a growth company, let's see an effort to pay out some of that cash to
investors through dividends," says Ritter.
Also, smaller companies with an unusually large sums of cash could prove a tempting takeover target, experts say.
GIVE BACK THAT GO-GO 1990s CASH
Another way to return some of that cash to shareholders is through share repurchase programs. When companies buy back
shares, per-share profits are boosted because earnings are spread across fewer shares outstanding. Those buybacks have been
a mainstay of equity markets since the early 1990s.
Already, tech behemoths such as Cisco, Intel and Microsoft spend tens of billions of dollars each year combined to buy back
shares to offset the dilutive effect of stock options.
Indeed, some say investor pressure will start to mount on firms that banked billions in the go-go 1990s and which now see
formerly rapid growth in their principal markets slowing.
Yet companies, particularly technology companies, have maintained it's wise, even in the best of times, to sit on cash, and even
more so when demand falls off a cliff.
Ask John Chambers, chief executive of Cisco, which has no debt, what he's going to do with that $21 billion, and he'll
invariably respond, "Cash is king."
Some investors agree.
"Cash is really a great strength because of the volatility of technology and the rapid change in the industry," says John Rutledge,
portfolio manager at the Evergeen Technology Fund. He notes he's comfortable with Cisco's, Intel's and Microsoft's propensity
to sit on the cash on their balance sheets.
"Having all that cash is probably one of the least of their worries right now," Rutledge says, adding that in some cases, loads of
cash is enough to warrant buying shares. "There are going to be some buys here."
GO SHOPPING!
But if not more R&D spending, boosted stock buyback programs or plumped-up dividends, what else is a company to do? Go
shopping, of course. Scoop up distressed competitors on the cheap and gain market share or move into new markets.
Yet that approach has problems, too, experts say.
"Sure, having cash earning 2 percent is not really enhancing shareholder value," says Ritter. "But investors also fear that if a
company has got the money they might go out and waste it, and indeed that's what has happened sometimes."
Ritter points to Ford Motor Co.'s purchase of venerable British car maker Jaguar more than 10 years ago. "Ford went out and
overpaid for Jaguar and the return to date on that investment has been pretty unattractive," he says.
Whatever the method, what to do with this embarrassment of riches proves to be a sticky question. "It's a real quandary where
to put this money," Rutledge says.
Rather than potentially ill-advised or overpriced acquisitions, larger buybacks or wanton spending on R&D, it seems the time
may be coming closer -- in the next few years -- for large tech companies to start jacking up their dividends.
"There's no doubt in my mind that if any of these companies announced they were going to start paying substantial cash
dividends, that the stock market would greet the news very positively," Ritter says.
Considering that the U.S. stock market is mired in the worst bear market since the early 1970s, technology firms might be
well-served to heed that advice sooner rather than later.
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