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Published 26 July 2013 08:14, Updated 29 July 2013 07:09
Technology companies such as Google and Apple are hoarding cash, much like Scrooge McDuck.
As the biggest technology giants in the United States report their results, the most striking trend is the huge cash piles these companies are sitting on.
Perhaps the most extreme example is Apple, which put out its quarterly results on Thursday. The Cupertino-based firm had $US146.6 billion ($158.1 billion) in cash at hand (ie. actual cash, cash equivalents and marketable securities) on June 29, 2013.
Seattle-based Microsoft had $US77 billion in cash at hand on June 30, 2013, according to its quarterly results last week.
Google , which also reported last week, had $US54.4 billion in cash at hand on the same date.
Facebook, which also reported on Thursday, had $US10.3 billion in cash at hand at the end of the June quarter.
Yahoo!, which reported last week, had less cash on hand than its Silicon Valley counterparts, with $US4.8 billion at the end of the June quarter, a decrease of $US1.2 billion since the end of 2012.
You could probably buy a small country for that kind of money – if you could find one for sale. One billion dollars alone is enough to fly into space with Richard Branson’s Virgin Galactic 4000 times. More seriously though, what else could these companies do with the cash, other than stockpile it?
Technology companies like having a war chest so they can make strategic acquisitions, whether the strategy is to bolster their own offering or to lock out competitors. Most acquisition deals in the sector are structured as a combination of cash and scrip.
Google recently agreed to pay $US1 billion for crowdsourcing traffic and navigation company Waze in June, though the acquisition is now the subject of an inquiry by the US Federal Trade Commission into whether it would give Google too much power in mapping.
Facebook has made five acquisitions in the past 12 months but none as big as the $US1 billion purchase of photo-sharing site and app Instagram in April 2012.
Yahoo! has been particularly active on the acquisition front under the leadership of Marissa Mayer, who became CEO a year ago. Since then Yahoo! has bought 17 companies, many with a mobile angle, and nine in the last quarter alone including the $US1.1 billion buyout of Tumblr.
Technology companies need to stay ahead of the curve because there is always an up and coming start-up ready to disrupt their business model. Just ask Nokia and BlackBerry.
Apple would not be where it is today without the iPod and the iPhone and the iPad and the iEverything, but it can’t rest on its laurels as it now has to contend with the rise of Android. Apple knows this and the company invested $US1.17 billion in the June quarter alone, up $US876 million a year ago.
Google has increased its spending on R&D over time, coming up with a huge range of products, from wearable technology such as Google Glass to social networking tools such as Google+. It is prepared to fail, and Gizmodo has a fun graphic showing all the products that Google has killed, from Google Reader to Google Wave.
This was the approach that Microsoft took a decade ago with the launch of the first Xbox console. In 1999 Microsoft was generating $US1.5 billion in cash every month from its Windows and Office businesses and had a stockpile of $US30 billion.
Microsoft went ahead with the project despite internal estimates that it would lose $US900 million over eight years, and $US3.3 billion if the company were forced to match Sony in a price war, according to a history of the Xbox published on VentureBeat.
In fact Microsoft reportedly lost $US4 billion on its first console but its successor, the Xbox 360, became a highly profitable business and one of Microsoft’s most successful diversifications to date.
If you have money to burn, you need to turn to the experts and there is no one better at burning through cash than a start-up. Of course, you may also hit the jackpot by investing in the next Big Thing.
An example might be Google Ventures, which is 100 per cent focused on investing for financial return rather than Google’s strategic goals. That leads to a wide range of investments including some outside the technology space, such as San Francisco-based boutique coffee roaster Blue Bottle Coffee Co.
Perhaps this is the most radical option of all. Technically the cash reserves belong to shareholders and should be returned if they are surplus to the company’s requirements. There is no real justification for hoarding them. Yet dividends are anathema to many US tech giants.
Apple started paying dividends only after the death of its founder, Steve Jobs, who was famously opposed to the concept. The dividends were $US2.65 for several quarters and on Thursday the company announced a dividend of $US3.05 for this quarter.
Microsoft is currently paying a modest dividend of US23¢ per quarter. However, Google, Yahoo! and Facebook, a newcomer to the Nasdaq, have never paid a dividend.
This story has been updated with revised figures for Apple and Microsoft to include marketable securities and short-term investments in the cash position.