February 12, 2009 / 5:39 PM / 9 years ago

Cash-rich tech companies move carefully in downturn

SAN FRANCISCO (Reuters) - Even as many U.S. companies struggle to stay solvent in one of the worst financial crises in decades, some technology companies are bursting with cash, with the only question being how they plan to use it.

While these tech companies are guarding their money and investing in only the safest of instruments, such as U.S. Treasury debt, analysts expect the bigger players to put their cash to work later in the year in the form of acquisitions or share buybacks.

“There’s a strong emphasis on the preservation of liquidity, but we think the larger players will use their balance sheets and use their cash balances to ignite mergers and acquisition activity,” said Fitch Ratings analyst Nick Nilarp.

Fitch estimates that the U.S. tech industry is carrying a cash balance of around $260 billion, one of the largest among all sectors. However, around $100 billion of that money is overseas, Fitch says, meaning it cannot be used in the United States for acquisitions or share buybacks without being repatriated and incurring a tax hit.

Cisco Systems Inc (CSCO.O) is the most cash-rich tech company with $29.5 billion on hand, putting it just behind Exxon Mobil Corp’s (XOM.N) $31.4 billion, despite having a market value less than one-quarter of the oil giant‘s.

Cisco has said it plans to be acquisitive during the economic downturn, and bankers and analysts think it may make a move on virtualization software maker VMware Inc (VMW.N) or its parent EMC Corp EMC.N.

Other tech companies with some of the largest cash piles in the United States include Apple Inc (AAPL.O) with $25.6 billion, Microsoft Corp (MSFT.O) with $20.7 billion, Google Inc (GOOG.O) with $15.9 billion, and International Business Machines Corp (IBM.N) with $12.9 billion.

Even companies whose share prices have been hammered by fears about weakening global tech spending are sitting on relatively large amounts of cash.

Sun Microsystems Inc JAVA.O carries a cash balance of $2.6 billion and a market cap of $3.8 billion, for instance, making it a possible takeover target for Hewlett-Packard Co (HPQ.N), IBM, Dell Inc DELL.O and Cisco, analysts have said.

CASH FOR TOUGH TIMES

Standard & Poor’s analyst Bill Wetreich said tech companies have historically been capitalized very conservatively to protect themselves from the industry’s inherent volatility.

“This is the rainy day, so to speak, that they were saving up for,” he said.

The challenge facing bigger companies is what to do with the cash they have, perhaps while they wait for valuations of potential acquisition targets to become even more attractive as the economy worsens.

Wetreich expects instruments such as short-term Treasuries to be popular, noting that some companies which had previously invested in higher risk assets such as auction-rate securities have been burned.

“At this point people are more focused on protecting principal and liquidity than maximizing yield,” he said.

    The old cliche that cash is king is never more true than in bad times. So as investors navigate tough financial markets, the cash hoards held by tech companies could make their shares more attractive and bolster the argument made by some analysts that the sector will lead the way out of the downturn.

    But it remains to be seen when tech companies might spend their warchests. With the 2009 outlook dire and uncertainty on when global demand can bounce back, caution rules.

    “I am quite sure that the treasury officers of the larger tech companies truly wish they had mattresses large enough to hide cash in,” said Eric Openshaw, the U.S. technology leader for Deloitte LLP.

    He does not expect to see companies put their cash to work in the next six months. “There’s a bit of a wait-and-see game going on,” he said, noting that companies may be simply waiting to see how bad it gets before moving in to scoop up intellectual property at bargain-basement valuations.

    Brian Bethune, chief U.S. financial economist with IHS Global insight, thinks share buybacks might be more attractive that acquisitions because companies know what sort of return to expect. If companies do acquire, he expects them to be very selective given the economic uncertainty.

    “I don’t think they’re in the mode just to look for bargains,” Bethune said. “If there’s a technology out there that they need to get a hold of, that they need to stay on top of the competitive curve, then they’ll do it.”

    Companies that generate lots of cash, such as IBM, HP and Dell, have spent billions buying back stock in recent years. However, with so much uncertainty, companies may become less aggressive. Applied Materials Inc (AMAT.O), the No.1 maker of semiconductor production equipment, suspended its stock buybacks in the face of the brutal downturn.

    (Reporting by Gabriel Madway; editing by Richard Chang)

    gabriel.madway@thomsonreuters.com; +1 415 677 2536

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