SPYROS FIDAS

The biggest US technology companies may have a surfeit of cash but leading industry executives have dashed hopes that they will use those resources to return money to shareholders or step up acquisitions in the downturn.

Instead, they are treating the financial crisis, which has left companies in many other industries starved of resources as the credit markets dry up, as vindication for a highly conservative financial stance that brought criticism in better times.

It’s not burning a hole in our pocket, it’s fine for it to just sit there,” said Eric Schmidt, chief executive of Google, which has amassed $16bn of cash.

“You’ll continue to see us long on cash,” said Steve Ballmer, chief executive of Microsoft, which has nearly $21bn. “In this environment, most people would tell you cash is king. Most people tend to guard cash pretty tightly, value having cash, because you never know when you might need some.”

The tech industry’s strong cash position has set it apart and left the biggest players with considerable financial flexibility. While companies including Microsoft and Cisco Systems have held large amounts of cash since before the tech bust early this decade, others such as Apple and Google have used the success of recent years to join the new super-rich elite.

Yet the experience of previous downturns and fear that they could need deep reserves to draw on in fast-moving technology markets has made them cautious to spend. Many in Silicon Valley still point to earlier near-failures, with Intel forced to take an investment from IBM in the early 1980s, and Steve Jobs famously accepting a $150m cash infusion from Microsoft soon after returning to head Apple in 1997.

Intel now has a rule-of-thumb approach of keeping enough cash on hand to fund one year of research and development and the capital needed to develop the next generation of chip technology, said Robert Burgelman, a professor at Stanford business school.

“Intel is in this relentless drive to make these massive investments that probably only Samsung can compete with,” he said. “The Japanese and the Europeans, they all blinked.”

Yet the cash cushions of other tech companies in less capital-intensive parts of the business now far exceed such requirements. Despite spending only about $2bn a year on R&D and capital investment, Apple’s $26bn in cash has left it with the biggest cash pile in the tech world – a big contrast to the last downturn, which it started with less than $4bn. The cash now accounts for about a third of its market value.

Since the last tech bust, many other tech companies have responded to pressure from shareholders to partially reduce cash balances by buying back shares and making smaller acquisitions.

Yet keeping a big cushion on hand also leaves the company with “a range of options” for the future, such as making acquisitions and investing its business, and also sends a strong message to customers about a company’s staying power, said Frank Calderoni, chief financial officer of Cisco, which has net cash of $20bn.

While saying the cash will help them get more value from their acquisitions, however, most tech executives say they are likely to continue to mount only relatively small deals and that even these may be few and far between.

“It is ultimately a strategic weapon,” said Mr Schmidt.

This article can be found at:

http://www.ft.com/cms/s/0/e729ed70-eb16-11dd-bb6e-0000779fd2ac,_i_email=y.html

By Richard Waters in San Francisco

Source: The Financial Times Limited 2009