Monday, 26 January 2009


(By Richard Holway) At a meeting I attended today, one of the reasons given for a belief that tech would cope reasonably well with the current downturn, was that many technology companies have high levels of cash and significantly more resilient business models than five years ago. By an interesting coincidence, the FT had an excellent article on the same subject today – Cash-rich US techs guard purse strings.

The FT has the following table:

It appears from the FT article that these companies are unlikely to mount any major M&A with this cash. Indeed, most seem to want to hoard the cash. Worse still, they might give it back to shareholders by way of share buy backs (something which I never think works)

Also, if you look at the list above you get a very good lesson about the perils of hoarding cash. The FT didn’t compare cash to share price performance – I have!

Apple (up an amazing 730% since 1st Jan 2001) and Google (up 285% since their 2004 IPO) have been the best performing shares, and companies, since 2000. Both started with relatively low cash balances and earned their current hoards by superb performance and positive cashflow.

The same cannot really be said of Microsoft (down 44%), Cisco (down 756%) and Intel (down 64%) which had the largest cash balances in 2000. None have done any major M&A.

Oracle really did use its cash to do a significant number of acquisitions. It is the only company in the list to have a lower (indeed negative) cash balance now than in 2000. Oracle’s share price is down 41% since 1st Jan 2001. That compares to a 44% decline in NASDAQ since 1st Jan 2001.

IBM has undertaken a significant number of acquisitions in the period – mostly strategic (just as we like) IBM’s share price is only down 5% in the period. Both companies seem extremely well positioned for the next few years.

The conclusion of all this, to me anyway, is that cash generation is the number one criteria to look for. Having done that, cash on the balance sheet of tech companies is pretty meaningless as a pointer to both company and share price performance. It is how companies use that cash that matters. You either invest in R&D (the Apple and, to an extent, Google model) or you do strategic M&A. Google, IBM and Oracle do both - which is just fine with me.

But, please don’t just hoard it!

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