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Tech's cash kings are sitting on billions

Ann Bednarz | Sept. 4, 2013
Compared to other industries, tech companies are the keepers of the cash

During the second quarter, the U.S. economy showed positive momentum, stock markets continued to climb, and IPO activity rose — yet the volume of technology deals dropped precipitously, according to PricewaterhouseCoopers.

Just 32 deals closed in the second quarter, a decline of 22% compared with 41 deals closed in the first quarter, PwC said in its quarterly report on M&A activity in the tech sector. On the positive side, the value of second quarter deals climbed 34% to $13.9 billion compared to $10.4 billion in the first quarter. But compared with the second quarter of 2012, deal volume and value decreased are still down sharply — 46% and 58%, respectively.

"After technology deal volume reached a four-year low in the first quarter of 2013, the second quarter proved equally disappointing as volumes dipped again sharply and value recovered only slightly," PwC stated.

Still, there were five billion-dollar transactions that closed during the second quarter: Yahoo's $1.1 billion acquisition of Tumblr; Google's estimated $1.1 billion deal for Waze;'s $1.8 billion acquisition of KAYAK Software; a Berkshire Partners-led $2.0 billion acquisition of Lightower Fiber Networks; and ASML Holding's $3.7 billion deal for laser maker Cymer.

Increasing confidence in the economy, a rising stock market, and rumors of impending tech transactions have PwC bullish on future M&A deal activity.

"With piles of unused corporate cash, increased momentum among private equity buyers, technology companies determined to fully embrace cloud and capture an increased share of mobile consumers, and executives eager to identify new avenues to fuel growth engines, technology deals may be down, but certainly not out," the firm wrote. "Recent deal announcements will help invigorate M&A in the technology industry in the latter half of 2013."

How much is too much?
Meanwhile, investors would like to see tech companies spend more of their rising cash holdings, and they're getting noisier about it.

"You're seeing pressure from investors because all of that cash, sitting, is not earning anywhere close to what someone would think is the cost of equity capital for these companies," SDSU's Varaiya says. "This cash definitely lowers their returns."

ValueAct and other investors are reportedly pressing for Microsoft to return more cash to its shareholders, for instance. Prior to unveiling its $60 billion stock buyback plan, Apple had been under pressure from investors, including David Einhorn of Greenlight Capital, to use its cash to reward shareholders.

Disagreement about optimal corporate cash holdings is nothing new, asserts Laurie Simon Hodrick, a visiting scholar at Stanford Institute for Economic Policy Research and Stanford Graduate School of Business.

Holding cash gives companies financial flexibility in times of heightened uncertainty — and there's plenty of that today, Hodrick wrote in a brief titled, "Are U.S. Firms Really Holding Too Much Cash?"


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