Corporate Cash Hoards

James Surowiecki writes,

Together, Google, Apple, and Microsoft have roughly a quarter of the cash reserves in the entire S&P 500. Google, the most active buyer, has averaged one acquisition a month. Acquisitions have become increasingly important as a way to gain new technology and new engineering talent, expand into new markets or new product areas, and in some cases squelch potential competition. And since no competitor has the resources to outbid the Big Five, it’s another way in which simply being big makes it easier to keep getting bigger.

My inclination is to doubt that having a cash hoard and making acquisitions is a durable advantage. If you cannot wring more value out of a company you buy, then you should not buy it.

But the big gorillas do affect the business environment. For a start-up in some particular category, it feels as if you are in a tournament, with the winner bought by Google or Facebook, and the losers going out of business. And you could be in some objective sense the best company in the tournament, but if Google picks someone else, you still lose.

8 thoughts on “Corporate Cash Hoards

  1. If that’s the game I suppose a lot of startups are thinking about how to give Google what Google wants (data, persistent tracking, profiling, social network analysis, reading and shopping habits, online identity correlation, attention, opportunity for exposure to targeted advertising, a way to hook users in and keep them “in house” for the one-stop-shop to enhance all of the above), and only give the customers what they want as a intermediate goal. (By the way, has “Alphabet” been the worst / most resisted rebranding attempt ever?)

    Having the equivalent of spyware installed on every new device must help a lot, but there seems to be more room for expansion in that direction, especially on PCs.

    One thing I want is for grocery store carts to start having mounts for my mobile phone, so I can use my shopping list app, and also use text to ask people in my household whether we need more X, because they’re on sale, etc.

    And I notice that Microsoft just bought Wunderlist, which is what I’ve been using. Hmm..

    If they could combine that with a “google maps” for the store layout, so I could have the most efficient way to get my stuff with the minimum amount of searching, that would be great.

    That app could also let me know of sales, specials, and coupons, or new items near where I’m standing.

    One of the Big-5 would probably be extract to extract some good, actionable intelligence from people that way. Maybe even get a cut of the grocery revenues.

    You could expand the idea into brick and mortar more generally, and again, if google gets a tiny percent of those purchases, their marginal costs are negligible, and the potential market is large (even global) so that still adds up to a lot of new profit.

  2. Isn’t a lot of the cash hoarding encouraged by the tax code? Dividends are still double-taxed, though it’s not as bad as it used to be.

    Why on earth we’d want a tax code that encourages big companies to stay big instead of paying out dividends and letting investors put money into smaller companies or start-ups is beyond me.

    • The “cash hoarding” by tech firms is encouraged by 2 tax rules. The first is that profits earned overseas are not taxed until brought back to the US in the form of a dividend (with an offset for taxes paid overseas. Tech firms are masters at avoiding tax, so they normally pay close to zero tax on the overseas earnings.
      The second tax encouragement is the one you mentioned, namely that dividends are subject to tax in hands of shareholder when paid. I think this is far less important than the first, as often corporations will pay a meaningful dividend to help its share price (and tech firms will if the market requires it).

  3. In general, I do find the whole tech market has always been the definition of very BIG winners with lots of losers. That has always hit me as strange since tech does not need a lot of capital to start up or grow. And it seems really easy to sell across nation’s borders. In many ways tech companies come across like American Professional Sports where the market works best with one dominant firm (or league/team) and there are few disruptions. (I tend to see tech is like the QWERTY keyboard in that once the population adapts to it, then it is exceptionally hard to get them to move.)

    1) If you cannot wring more value out of a company you buy, then you should not buy it. My guess there is a lot of this but there is also way to ensure their place in the market as well. Sort like the old makers of cereals sell too many varieties to make limit the market to entrants.

    2) It seems like one aspect of cash hording that makes sense is these firms can lose their position fairly easily and lots of cash helps the firm stay in business. If Apple was not loaded with cash in the 1990s they don’t make to the iPod in 2001.

    3) In terms of Uber, I really wondering how VC continues to give them so much money. I know they love the contractor model and think of it as ‘tech’ but it is only gaining market share losing $1B a year.

  4. I see it as two different issues.

    The cash hoard, at least in the case of Apple, is driven by US tax laws that would generate a taxable event if the cash is repatriated. So better to let it sit overseas.

    The acquisitions are a sort of outsourced R&D. It actually may be somewhat efficient in that Google/MSFT/Apple don’t have to R&D everything, just stuff that is deeply proprietary. They can use acquisition to acquire ‘features’ that ‘catch’ with their audience. Since heavy social media users seem to have the attention span of a gnat and tech moves really fast in general, I could see it being cheaper to acquire the handful of potential winners than fund a bunch of stuff that may or may not win.

    That may also be influenced by (1) SOX etc making selling more attractive than going public and (2) concerns about leveraging their positional advantage to make their organic investments winners triggering antitrust actions. Google could try to use their heft to make their internal team a winner, but could trigger a fine from the Euros (or whoever).

  5. It may be tech is an area when economies of scale are very important and lots of small companies can and do exist in other areas.
    There is a lot more to the cash hoard, tax issues and market issues. But they really more the discussion away from the main point.

  6. I work for a Canadian provincial government and every year we do roadshows to convince banks and other potential investors to buy our bonds. Apparently one of these presentations is given to Apple Computers. This seems crazy. Why is Apple Computers investing in provincial government bonds instead of say computers? I don’t know much about corporate finance, but isn’t there a danger in these big nonfinancial corporations owning so many financial assets?

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