Hundreds of Billions Sitting on
Tech Companies' Balance Sheets
There are two trends in the world of technology that
are continually gathering steam and can’t help but collide.
Follow the Tech
First is the meteoric growth in the worldwide
movement of data, particularly via mobile devices, and how that projects into
the very near future. The numbers are way beyond the grasp of the normal
human mind.
This is a technology that’s barely out of
diapers. The first flip phone didn’t reach consumers until the Motorola
clamshell stormed the scene in 1997. Now the worldwide mobile-phone
population is almost 6 billion; by the end of next year, there will be one
for every man, woman and child on the planet.
And the first mass market smartphone, Apple’s
iPhone, has only been with us for five short years. Yet last year, across the
globe, sales of smartphones totaled nearly a half-billion, a figure
that’s expected to double by 2015.
Today, about the last thing someone wants a
smartphone for is to hear the sound of another human voice. Customers are
demanding ever more from these amazing devices, from texting their pals to
watching videos, to trading stocks, to making a dinner reservation, to
measuring the distance to the 13th green. And much, much more.
Almost anything you can conceive of, yeah, there’s an app for that.
It’s an anachronism to call them phones anymore.
All of which means there’s already a
staggering amount of data that must be moved, bit by byte, and the
industry’s growth curve has morphed into a line that is virtually
vertical. Talk about incomprehensible. The average person has barely gotten
used to hearing the word billion bandied about like it was a
commonplace amount, but a billion is so yesterday. How about a billion
billions?
In its recent publication, Visual Networking
Index Global Mobile Data Traffic Forecast for 2011-2016, Cisco predicts
that worldwide mobile data traffic will increase 18-fold over the next five
years, reaching 10.8 exabytes per month – or
an annual run rate of 130 exabytes. For those
scoring at home, an exabyte is a billion billions,
or one quintillion.
Think of it this way. Suppose you have a computer
with a 500 GB hard drive, and it’s crammed full. A run rate of 10.8 exabytes means you have to move the entire contents of
your drive from somewhere to somewhere else, 21.6 million times. Every month.
And remember, that’s just mobile. There
is also traffic among traditional, fixed data centers. Not to mention the
mass stampede to the “cloud.”
According to Cisco, yearly IP traffic over all data
center networks, combined, passed the zettabyte
mark in 2010 (a zettabyte = one sextillion,
or a trillion billion bytes), and the company projects that that number will
reach almost 5 zettabytes annually by 2015, with
cloud computing comprising about a third of the total. The data equivalent of
all movies ever made will then cross Internet networks – every five
minutes.
No two ways about it, managing that data stream is
one nasty job. It’s an extraordinarily complicated job. But
somebody’s got to do it. And not just one somebody, either;
there’s far too much data for that. Everyone in the information
technology business is scrambling to take as big a slice of this Boston cream
pie as they can cut for themselves.
Almost on a daily basis, the big companies roll out
enhancements to their services, while any number of smaller
outfits nip at their heels, promising to tweak some aspect of the
process so that it runs faster, simpler or safer.
That’s trend number one. It’s huge,
it’s getting huger, and it’s unstoppable.
Then Follow the Money
Trend number two consists of a single word, although
as with real estate and location, it doesn’t hurt to repeat it
thrice: cash, cash, cash. The tech giants are
awash in it. They’re hauling it in hand over fist. They’re making
so much money, they literally don’t know what
to do with it all.
How much cash and cash equivalents are on their
balance sheets? Well, based on the holdings of just the 35 members that comprise
the Morgan Stanley Technology Index, levels have grown over the past year by
21%, to $513 billion. Over half a trillion dollars. Serious money. Among the
biggest holders:
✔ Cisco – $44.4 billion
✔ Google – $45.4 billion
✔ Microsoft – $51.7 billion
✔ And of course, the king of the hill would be Apple – a
whopping $97.6 billion
One of the reasons there’s so much sloshing
around in the till is that a large percentage of this money is held overseas.
Globalization is a fact of life for everyone, but for many of the largest
tech companies it’s even more important than that, because they
generate the majority of their pre-tax income abroad. And there it still
resides. To the tune, all companies included, of some $1.5 trillion. Why?
Because overseas tax rates are substantially lower than they are stateside.
The corporate tax rate in the US is 35%, which will
be the highest in the developed world after an April Japanese tax cut. By
contrast, most large S&P 500 firms pay an international tax rate between
13% and 25%, while many of the tech giants pay 10% or less. Apple, according
to an analysis by market watcher Bernstein Research, pays less than 3%.
So if you were them, what would you do?
Right. Repatriation of funds for these companies would come at a steep cost
that makes no sense to them at this point.
Now, President Obama is offering to cut the domestic
rate to 28%, but that’s still a lot more than Apple and others are
paying. Plus, there are conditions attached that don’t sit well with
various interest groups. With so much election-year arm-waving going on, and
people on all sides pushing their agendas, the chance of any meaningful
corporate tax change happening before November is near nil.
There is, however, always the possibility of a tax
holiday. This was tried before, in 2004-2006, when US companies took
advantage of the opportunity to bring back more than $312 billion over the
two-year period. But opinion on what that achieved is deeply divided. Some
studies indicate that companies used a substantial portion of the repatriated
revenue to increase employment and investment above what they otherwise would
have done. But others conclude that the companies mainly used the money to
pay off debt, hand out dividends and engage in stock buybacks. The results
differ because corporate resources are fungible, and any attempt to tie a
particular expenditure to a particular source of funds may depend more on the
bias of the investigator than anything else.
Many proposals for different varieties of tax
holiday have been floated. None has yet achieved the kind of traction that
would suggest a mutually agreeable deal could be struck between Republicans
and Democrats. But hey, this is an election year, and both sides will have to
attract a fleet of 18-wheelers filled with corporate cash. So
you never know, anything could happen.
One thing we do know, though, is that companies
can’t just let their billions sit there indefinitely, doing nothing. We
may see a spike in dividends, as some analysts believe, ahead of tax hikes
due to kick in next year. That would benefit shareholders, including
corporate officers who have stock. But it won’t much benefit the
companies going forward. Not when their future success will largely be
measured by how much of the aforementioned pie they can grab.
You can’t run in place in this business. Nor
is simple innovation enough. To maintain your position, or improve it, your
innovations have to be better than your competition’s. And if you are
an established company with funding resources, there are only two ways to do
that: develop new product in house, or go out and buy it.
Both will happen.
In-house development, however, is costly, time
intensive and totally dependent of having exactly the right kind and quality
of brain power already on board. Oftentimes, it's simpler and cheaper to just
take over a company that's already done the necessary spadework.
Not all of that valuable intellectual property is
for sale, of course. Some will result in IPOs, on the part of companies that
want to maintain their independence. And some of it will remain private,
supported by investment from venture capital firms.
But the deep-pocket players will play. They have to.
It's just sound business practice. With the vast amount of money presently on
the sidelines, with fingers itching to pull the trigger on putting it to use,
and with low levels of debt throughout the tech field, you can bet that there
is going to be an explosion in mergers and acquisitions. Many of them for
cash.
In fact, the mania is already approaching a boil.
2011 saw nearly $200 billion in M&A activity, the most since 2007’s
pre-crash peak of $264.4 billion (albeit well short of the $585 billion
all-time record set in the last of the go-go years, 2000). That represented a
36% increase in technology deals last year, far ahead of the 4% advance for
all M&A worldwide, according to Bloomberg.
Included were such blockbuster deals as:
Hewlett-Packard’s agreement to buy Autonomy Corp. for $10.3 billion, as
H-P maneuvers to build its software business while scaling back on its PC
manufacturing; Google’s bid of $12.5 billion for Motorola, which was
more about the latter’s mobile patents than its hardware; and
Microsoft’s purchase of Skype for $8.5 billion, the biggest Internet
takeover in more than a decade, and a clear effort to gain on Google in
online advertising and on Apple in mobile software.
There is also a carryover of some $8 billion in
private equity deals that have been announced but didn't close by the end of
last year.
Chet Bozdog, global head
of technology investment banking at Bank of America, believes that
“this year’s technology deal volume could be bigger than last
year’s, and 2007’s,” and he adds that the key is,
“Convergence between hardware, software and services will continue to
add products to the same sales chains.”
Cisco and IBM in particular are known to be looking
at strategic moves that would boost their capacity to provide new storage,
analytics and security services to enterprise customers. Apple admitted last
month that it’s mulling ways to spend its funds and would consider
acquisitions. While Google hasn’t publicly discussed its plans,
it’s dead certain to be a factor. And anyone else flush with dollars
will be forced to deal or go home.
In fact, Cisco kicked off the buyout season just last
week, as it announced that it will pay $271 million in cash plus incentives
to absorb privately held networking technology firm Lightwire,
Inc. Lightwire brings to Cisco optical connectivity
technology, which is the stuff of the next-generation, super-fast networks.
With all of this favoring an M&A mania, there
are nevertheless a couple of things that could serve to cool the trend, at
least a little.
One is that, despite the recession, valuations in
the IT field are sky high. That means companies in the crosshairs will be
subjected to very careful scrutiny, to see if the buy price is justified by
the amount of value added to the acquirer. It could lead to some measure of
trepidation on the part of those controlling the M&A purse strings.
Another is that the IPO waters have been friendlier
of late, giving companies a chance to go liquid
without giving up control.
Even taking these caveats into account, it's still probably gonna be one
heck of a year.
[With all the new breakthroughs in cancer treatment,
2012 is shaping up to be one heck of a year for biotech as well. Free report reveals four small
firms perfectly positioned to do especially well this year.]
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