Santa Barbarian at the Gate

Musings on a barbarian's interests

The false temptations of a wealthy company

Just a quick re-post and response to a dealbook entry today that I found fascinating.  There has been an ongoing debate in the financial watching — and investing — community about the path cash-rich technology companies should follow to maximize long-term shareholder returns.  On one side, there are analysts (e.g. the Alliance-Bernstein ones mentioned below) who argue that these companies (Google, MS, ORCL, etc) should distribute a dividend of their cash reserves, and then raise debt or equity capital if/as they need it to perform acquisitions.

Ok, I buy that’s one reasonable path.  But for me to believe the argument, I’d want to see a pretty detailed assessment of the impact on imputed growth expectations in these companies’ share prices.  Their strong balance sheets show they can grow opportunistically — through acquisition or internal investment.  Moreover, even if some acquisitions fail, or the price paid ends up being unjustifiably high, there are others that are quite successful (MySpace still looks pretty brilliant for NewsCorp.).  So, isn’t the real point that companies should seek to grow, profitably, and acquire wisely?  Or do we really think their stocks will move like GE’s?

April 7, 2009, 1:11 pm <!– — Updated: 4:17 pm –>

Google and the Temptations of Being Cash-Rich

As blogs continue to debate whether Google might be considering a deal for Twitter, analysts at Sanford C. Bernstein are making their views on the subject unmistakably clear.

Not only have they repeated their claim that Twitter’s business model is flawed (or nonexistent), but they went even further in their latest report: They said that Google and other successful Internet companies would generally be doing their investors a favor if they returned their cash to shareholders rather than using it to buy unprofitable start-ups.

The analysts argue that Internet companies have a bad track record when it comes to acquiring “pre-business-model” companies like Twitter, a popular microblogging service that has yet to produce profits — or even revenues. The Web is littered with examples of promising but ultimately value-destroying acquisitions, they wrote in a note to clients, citing deals like AOL’s $4.2 billion acquisition of Netscape and eBay’s $4.1 billion acquisition of Skype.

Pressure to put cash to work may have led to some of the disastrous deals in Silicon Valley over the years.

And Google is expected to be sitting on $17 billion in cash and $7 billion in short-term investments, earning about 1.8 percent before tax, by the end of 2009, the analysts said in a note published late last week. With all that cash on hand, Google executives might not be able to resist a high-priced acquisition, they suggested.

But a deal for Twitter would continue the cycle of big Web companies basically subsidizing the pursuits of Silicon Valley venture capitalists, the analysts asserted — all at the expense of shareholders.

It is worth noting that Google’s chief executive, Eric Schmidt, recently said his company doesn’t expect to be active in making acquisitions. In addition, Google paid for YouTube, the video-sharing service, with stock, not cash.

Even so, the analysts at Sanford Bernstein said they think Google should consider giving, say, $20 billion of its cash pile back to shareholders in a one-time dividend of about $60 a share.

Such a move is not likely to happen. But the analysts contend that by putting the easy money out of reach, Google or other Web executives would be forced to go to the debt and equity markets to fund a deal — which could help ensure that they do not overpay.

Cyrus Sanati


One comment on “The false temptations of a wealthy company

  1. Jim Baylor
    April 18, 2009

    Buddy, you missed the point. The article is suggesting that a publicly traded company should “grow profitably” by making wise acquisitions. That is the obvious premise of the article. From this premise, the author argues that cash-rish tech companes do NOT ACQUIRE WISELY. It’s not a question, as you suggest, as to how these acquisitions to be financed.

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This entry was posted on April 7, 2009 by in Blogroll, Economics, General Business, Venture Capital.
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