The billion-dollar club, 4/26/99

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This story appeared on Network World Fusion at www.nwfusion.com/nw200/200akamai.html

Some top Network World 200 companies have stockpiled cash reserves that would make any miser proud. But could they be putting their money to better use?

In the 1961 classic English novel Silas Marner, George Eliot created the archetypal money lover. Marner spent his evenings alone, in the dark, counting his hoard of gold. A look at the NW 200 confirms that Marner isn't alone in his love for cash.

Specifically, 19 companies surpass $1 billion in cash assets. Nearly half of those have accumulated $2 billion or more, with Microsoft surpassing them all. The software maker has almost $14 billion cached (pun intended). Intel lands in second place with more than $7.6 billion, and IBM is in third with $5.7 billion.

When factoring in the debt of these billionaire savers, another miser appears: Novell. Novell has kept $1 billion in ready money for years now and owes virtually nothing. That kitty is just about equal to what Novell earned last year -- its 1998 revenue reached $1.2 billion -- and adds up to twice as much as a software company its size typically stashes. Now how many of you can manage to keep a year's wages in the bank, debt-free?

"If you look at the leading techno-logy companies and compare, whether you're looking at cash to total balance sheet or cash to revenue, [the analysis] says we should have about $500 million in the bank," says Dennis Raney, chief financial officer of Novell. "But we have not had any negative comments about having too much."

On the contrary, Raney and analysts say. Novell's available cash has contributed to its comeback -- proving to shareholders, analysts and customers that the company "had the resources to execute its turnaround plan," Raney says.

A turnaround that, by all accounts, Novell accomplished last year.

True, these stockpiles didn't sprout up overnight. Most have taken years to build, says Greg Rossman, managing director for Broadview, a Fort Lee, N.J.-based investment banking firm that focuses on technology mergers and acquisitions.

And for companies such as Novell in defensive, rebuilding modes, survival depends on "maintaining an adequate cushion to fund cash flow," says Nat Burgess, senior vice president of Corum Group, a Bellevue, Wash., software merger and acquisition boutique.

But is too much cash ever a bad thing? Well it's never actually bad, financial analysts say, but hoarding isn't the best choice.

In fact, Microsoft has taken some heat in recent months over its $14 billion in cash and liquid investments. The argument is that the company could be doing more with that money, says Michael Wieberg, equity research analyst for ING Barrings, an investment firm in New York.

Given that Microsoft doesn't pay dividends, it's a valid argument.

"The assumption is that a public company should put the cash to work, either in dividends or acquisitions. Microsoft should have better things to do with that money than letting it sit in the bank," Wieberg says.

What the company will spend that cash on is the question. Currently, Microsoft's major focus for the money is buying back its stock, mostly to continue offering it to employees -- a huge bargaining chip in today's fight for top talent. Likewise for Novell, which is buying back 10% of its outstanding stock.

As for the rest? Some wonder if Microsoft is keeping itself ready for a large cash payout settlement that could result from its legal troubles. Maybe, but experts speculate that such a payout would hardly reach $14 billion. Or Microsoft could be banking on the possibility that the Depart-ment of Justice will break up the company, in which case its splinters would need cash to reorganize. Microsoft isn't saying.

The liquid picture

On the other hand, some equity experts contend that a better way to assess cash is to compare it to overall assets, rather than revenue, says Gary Wiebke, editor of the Armchair Millionaire Investor Center (www.armchairmillionaire.com) and a former equity analyst with JDK Partners, both in New York.

For instance, Microsoft currently has $14 billion in cash and liquid investments and $22 billion in overall assets. So slightly less than half of the company's total worth is in cash. While the amounts have been rising, the ratio of cash to total assets has been roughly stable. In 1997, for example, Microsoft had $9 billion in cash and $14 billion in total assets.

Moreover, Microsoft's is the fastest growing stock, so "it's hard to claim it should be doing more for its investors," contends Wiebke, adding that the company will unquestionably do something with the money. "But to second-guess Microsoft management and say it isn't doing enough -- I think it has earned the benefit of the doubt."

Furthermore, Microsoft isn't really "saving." Instead, it's earning faster than it can spend. Part of that is the nature of the software business, which has very little overhead compared with other technology businesses. So the same accusations of lackadaisical money management aren't hurdled at, say, Intel with its $7.6 billion stash.

The operating costs of a semiconductor business are huge, says Greg Mischou, senior semiconductor analyst for Warburg Dillon Read, an investment banking firm in San Francisco. For instance, today's state-of-the-art fab costs $1.5 billion to build.

"In the future, the cost will go up dramatically. For a future 300-millimeter fab, the cost will exceed $2 billion," Mischou says.

Moreover, revenue streams are cyclical. A company like Intel needs to hang onto its money to pay its bills through those slow times.

As for the rest, a savvy cash-heavy company will spend on acquisitions. In fact, other than Intel's stock buy-back program and operating needs, that's the target of its leftover funds.

The company's cash position lets it make acquisitions and grow new areas of business. Intel has announced a number of acquisitions in the network area -- Case Technology, Dayna Communications, iCat, Level One Communications and Shiva.

The bottom line is, too much cash is a nice problem to have.