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Tech's Idle Billions

By Steve Rosenbush The tech sector isn't just rich. It's filthy, stinking rich.

Tech companies look flush even at a time when many corporations in other industries are loaded. Companies in the Standard & Poor's 500-stock index, excluding banks and other financial institutions, had a record $766 billion in cash at the end of the first quarter of 2005, according to researcher Thomson Financial (see BW Online, 7/7/05, "Meet Tech's Cash-Rich Royalty"). The 80 tech companies on that list generated $229 billion, or about one-third of the total. Yet the tech sector accounted for less than one-fifth of the 418 nonfinancial companies on the index.

That cash hoard is likely to grow this year, as companies take advantage of a one-time federal tax break that will allow them to repatriate billions of dollars in overseas earnings.

FIXED-INCOME MENTALITY. The trouble is, few tech companies are doing anything exciting with all that loot. Many chief executives are using their funds sparingly. Several years after the tech bust ended, they're still unnerved by weak revenue growth and a stagnant stock market.

So they're playing it safe, behaving like well-off retirees who clip coupons and live off the interest of their nest eggs. With the tech downturn still fresh in their minds, relatively few business leaders have regained the sense of boldness that goes hand in hand with making advances in new technologies, products, and markets. "If tech companies were going to do something big with their cash, they would have done it already," says Pip Coburn, tech strategist at UBS.

What are tech companies doing with their dough? In many cases, they're simply returning it to shareholders. The classic example is Microsoft (MSFT). While the software giant continues to invest in new businesses such as TV that uses Internet standards (IPTV), those investments pale in comparison to the dividend it issued last year.

M&A FOLLY? Pegged at $3 a share, Microsoft's dividend $10 billion in shareholders' hands. The company also plans to buy back up to $30 billion in stock during the next few years. And it still has $38 billion left in the bank after the dividend. Incredibly, that amount continues to grow at the rate of $1 billion a month.

Microsoft isn't alone. Computer giant Dell (DELL) spent $2 billion to buy back 50 million of its shares during the first quarter, and that leaves with $9.8 billion remaining in hand. And semiconductor powerhouse Intel (INTC) spent $2 billion to buy back 114 million of its shares during the latest quarter, and it still has $16.1 billion. Companies in general are frustrated about their stock prices, and they have the financial wherewithal to do something about it.

Of course, companies are also using their massive amounts of cash to make acquisitions. In software alone, Oracle (ORCL) has combined with Peoplesoft, Symantec (SYMC) with Veritas (VRTS), and Adobe (ADBE) with Macromedia (MACR).

BRAVE EXCEPTIONS. Acquisitions often make for good headlines, but the truth is that few tech deals work out. Yet merger-and-acquisition activity hit $825 billion last year, up 40% over 2003, according to Thomson Financial. In one recent example, Sun Microsystems (SUNW), pressed to find new markets for growth, announced in June that it would acquire StorageTek (STK) for $4.1 billion. The deal wasn't well received by analysts, who viewed it as an expensive undertaking unlikely to kick-start revenues.

Of course, some companies haven't fallen into the miserly ways of many in techdom. Telecom giant Verizon (VZN) is spending billions a year to construct fiber-optic broadband networks that will carry superfast Internet access and TV signals. And Intel (INTC) is sinking billions into new chip-manufacturing plants in Ireland and Chandler, Ariz.

Despite these worthy exceptions, Wall Street in general simply won't allow companies to take too many risks. It's focused as never before on quarterly results. Investors were burned by Nasdaq's crash of 2000, and a new generation of traders and hedge funds with the fleetest of investment horizons has come to the fore.

DODGING RISK. "It's just no longer acceptable on Wall Street for companies to make longer-term strategies designed to pay back four or five years in the future," says UBS's Coburn. In such an environment, few CEOs are willing to commit to a chancy but potentially important project like a massive broadband deployment or a new manufacturing site.

This timidity also reflects the fact that business isn't that great, despite a huge run-up in cash and profits. Companies cut costs and sold off poorly performing businesses after the Nasdaq crash. That helped boost the cash reserves of once-marginal players and raised profit margins for others. But revenue growth and stock market performance remain sluggish. So corporate leadership still feels averse to risk.

Even the government is trying, with some success, to get companies to invest more in their businesses. Alarmed that businesses were shifting profits overseas to avoid U.S. taxes, Washington granted a one-time break last year. The Jobs Creation Act of 2004 allows companies to return cash to the U.S., avoiding taxes if they invest the money in job-generating projects.

OVERSEAS THREAT. Many big tech companies like Hewlett-Packard (HPQ) are still deciding how much, if any, cash to repatriate. HP could return as much as $14 billion. And Intel could bring back as much as $6 billion. (On the other hand, several big tech companies have made up their minds. Dell will repatriate $4.1 billion, using the money for projects such as a manufacturing facility in Winston-Salem, N.C.)

No one wants to see a return to the reckless ways of the late 1990s. But the fact is that U.S. companies are under pressure from overseas rivals as never before and can't afford to sit on their hands, much less on the stockpiles of cash they could invest in growth.

This spring, BT Group (BT) announced the winners of a contract to build a new Internet protocol communications network. Huawei, the Chinese Internet equipment maker, turned heads by winning a place in the project alongside Cisco and Juniper (JNPR). U.S companies have dismissed Huawei because of its reputation for price-cutting and theft of intellectual property. But Coburn says Huawei and other Asian manufacturers also benefit from the fact that they have long-term strategic horizons. They don't need to worry about pleasing shareholders, so they can invest in the future.

U.S. companies better start paying more attention to the Huaweis of the world and less attention to the dictates of the corporate masters of the moment on Wall Street. Thanks to careful management, CEOs have a ton of cash on their balance sheets. Now it's time to put it to good use.

Rosenbush is a senior writer for BusinessWeek Online in New York

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