Tech Firms Cradle Cash

Tech Firms Cradle Cash
Reserves Enable Pursuit of Buyouts, But Wall Street Withholds Reward

By PUI-WING TAM
April 17, 2008; Page C1

Technology companies from eBay Inc. to EMC Corp. are embracing cash more than ever amid fears of an economic downturn. If only Wall Street would reward them for it.
While companies have boosted their cash hoards, some of the most aggressive movers into cash in the past year have been technology companies. As of late last month, the technology sector -- which already had been heavy on cash in the past few years -- held nearly $232 billion in cash and cash equivalents, up more than 6% from nearly $218 billion a year earlier, according to Standard & Poor's.
That compares with the 1.5% rise in total cash at all companies in the Standard & Poor's 500-stock index in the same period, said S&P, and is the most held by the technology group since S&P began tracking cash by sector in 2005.
The technology industry also has the biggest proportion of assets -- nearly 25% -- in cash and equivalents, compared with other sectors, according to research firm Strategas Research Partners LLC. The next-biggest percentage is the health-care group's 16.6%. S&P 500 companies on average have 11% of assets in cash, said Strategas.
By beefing up cash holdings, technology companies are trying to avoid a repeat of early this decade, when many found themselves at the epicenter of a dot-com, crash-fueled downturn and ended up going bust.
Some of the increases have been significant. Data-storage giant EMC boosted its cash to $4.5 billion by the end of 2007 from $1.8 billion at the end of 2006. Internet auctioneer eBay reported Wednesday that its cash holdings had increased to $3.6 billion from $2.7 billion at the end of 2006.
Besides enabling companies to access money easily in case of emergencies, big bank accounts enable them to pursue acquisitions and other growth strategies amid a depressed economic environment.
"It's a great comfort to have the flexibility to do what we need to do," said Jesse Greene, vice president of financial management at International Business Machines Corp. Big Blue had cash and equivalents of $15 billion at the end of 2007, nearly double the $8 billion of a year earlier. Mr. Greene said IBM is better-positioned than it was in the downturn in 2002, when it had $5.4 billion in cash.
Mr. Greene said IBM will use some of the cash to close on its acquisition of software firm Cognos Inc. -- a $5 billion deal announced late last year -- and said the company also has a multibillion-dollar share-buyback plan. When IBM announced earnings Wednesday, it said its level of cash, cash equivalents and marketable securities had fallen to about $12 billion.
Investors haven't rewarded technology companies for their prudence. The technology-stock-heavy Nasdaq Composite Index is down 11% this year, compared with the 7.1% decline in the S&P 500. On Wednesday, the Nasdaq rose 64.07 points, or 2.8%, to 2350.11.
Technology companies are considered among the first to experience upturns or downturns in the economy, and their earnings -- with first-quarter financial results being reported this week and next -- are expected to get weaker before they strengthen.
Investors are "doing the quick mental math of the last recession, where tech was the last place to be," said Brendt Stallings, a portfolio manager at TCW Group in Los Angeles whose team manages more than $1 billion. "It's a knee-jerk reaction."
Less Second-Guessing
Still, technology companies said there has been a benefit to all this cash: less criticism. Wall Street often gripes about technology companies that stockpile cash, arguing they should plow the money back into expanding their business -- or returning the funds to shareholders through dividends and share buybacks. Some of that criticism has quieted as economic jitters have spread.
"The volume of questions has gone way down," said Marv Burkett, chief financial officer at Nvidia Corp., a Santa Clara, Calif., chip maker that boosted its cash and marketable securities to $1.8 billion at the beginning of this year from about $1.1 billion a year earlier.
Can there be too much of a good thing? Jeff Van Harte, a portfolio manager at Delaware Investments, said too many already-strong technology companies are hoarding cash, such as Intel Corp. and Apple Inc. Those companies can afford to be more aggressive in using cash for share repurchases rather than letting it just sit around, he said.
"It's the smaller tech guys who need to worry about liquidity," Mr. Van Harte said.
Some on Wall Street think it may be time to put more money into the stocks of technology companies that can afford to make purchases in an economic downturn. The cash means the companies "don't have to pull in their horns and can use cash to acquire," said TCW's Mr. Stallings. The portfolio manager, who mostly buys midcapitalization names, said he particularly likes fast-growing technology companies with lots of cash. Examples include Internet software concern Salesforce.com Inc.
War Chests
Companies that do have cash are likely to find attractive prices for any acquisitions. "It's a buyer's market," said Mr. Burkett of Nvidia. There has been a spate of recent deals in Silicon Valley, including Oracle Corp.'s $8.5 billion acquisition of software company BEA Systems Inc. Some are trying to pull off deals at what their targets say are cut-rate prices depressed by the decline in the market, including Microsoft Corp.'s unsolicited bid for Yahoo Inc.
Technology companies have used different methods to ramp up their cash. Some tapped the markets through spinoffs and other transactions last year before the credit crunch froze up financing last summer. Others switched to keeping their regular cash flow in cash rather than investing in their own operations.
Some shifted out of short-term securities known as cash equivalents, as some cash equivalents -- such as the $330 billion market for auction-rate securities -- have imploded.