It’s a nice problem to have.
Sales and profit gains at technology companies have filled their coffers with cash, raising the question of what to do with it all.
Irvine-based Broadcom Corp., Costa Mesa-based FileNet Corp. and others have been accumulating cash with the tech rebound of the past few years.
Chipmaker Broadcom and software developer FileNet alone have $2.5 billion in cash and investments between them, most at Broadcom.
Now they and others are facing questions about what to do with all that dough.
The situation isn’t unique to Broadcom and FileNet.
Cash among companies that make up the S & P; 500 index have reached record amounts, according to Standard & Poor’s Ratings Services.
As a percentage of market values, technology companies had the highest percentage of cash at 12.6%, according to S & P.; The average for companies in the nine sectors of the S & P; 500 was 7.4%.
“It’s great that they have the cash,” said Francois Mallette, vice president of London-based L.E.K. Consulting LLC. “Let’s recognize that corporate North America has been successful for various reasons. Now, we have a good problem to solve.”
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Broadcom testing lab: company spent $200 million on acquisitions in past few years |
The most extreme case: Microsoft Corp. and its $35 billion in cash,more than the economy of Luxembourg. Investors are pressuring the company to use the money to buy back shares or pay dividends to shareholders.
Broadcom has bought back some shares and made some acquisitions. But some have wondered if a dividend might be in order.
FileNet made a small acquisition last year. It hasn’t bought back shares or moved on a dividend.
Bearish Sign?
Some see the tight purse strings as a bearish sign. By parking cash in short-term investments with low returns, companies are saying they can earn more by investing in safety,rather than plowing more cash back into the business or by buying companies.
Broadcom’s cash and investments were $2.3 billion by the end of the first quarter, up 23% from the end of the fourth quarter and up about 60% from a year earlier.
The chipmaker’s cash to market value was about 10% at the end of the first quarter. With a drop in its shares since, Broadcom’s cash to value was more than 14% last week based on the $2.3 billion from late March.
At Broadcom’s annual meeting in April, Chief Executive Scott McGregor got a question from a shareholder about a cash dividend.
Tech companies scof-fed at dividends in the 1990s. That view has softened in the years since. Microsoft paid a massive dividend to shareholders a few years ago.
“We have discussed it,” McGregor said.
The chipmaker has opted not to go with a dividend for now, he said.
If Broadcom continues “to see strong cash build up,” it would consider a dividend, McGregor said.
Broadcom Buyback
Broadcom has been using cash to buy back shares and for acquisitions.
The company is in the midst of buying back about $500 million in shares. The move cuts the number of shares outstanding, boosting Wall Street’s favorite number, earnings per share.
Broadcom traditionally has used cash to help fund acquisitions. From 2003 to 2005, the company spent more than $200 million, including cash and stock, to buy 11 companies.
The company has said it’s looking for more acquisitions as a way to enter markets where there’s growth potential.
Broadcom typically doesn’t go for big blockbuster deals that eat up a lot of cash. Instead, it goes after younger companies in promising fields. It could buy a dozen such companies with its cash on hand.
The chipmaker is searching for more possible buys, McGregor said.
Analysts are asking about the cash. During a conference call in April, Needham & Co.’s Charlie Glavin asked about Broadcom’s “stra-tegic plans” for its money.
The company doesn’t plan on spending the $2 billion entirely on acquisitions, Chief Financial Officer Bill Ruehle said.
Where is the cash coming from? It’s not just from net income, which about doubled to $400 million last year.
Some of the cash is coming from stock options holders who are cashing in. With the stock up so much,it reached multiyear highs in early March,employees are exercising their options.
The cash paid to buy the options at the exercise price goes to Broadcom. About $385 million in cash came from stock options exercised during the past quarter, the company said.
FileNet
FileNet’s cash and investments only are a fraction of Broadcom’s. But they’re bigger as a percentage of the company.
The business software maker had $421 million in cash and investments by the end of the first quarter, up about 7% from the prior quarter and 15% higher than a year earlier.
FileNet had sales of $422 million last year.
The company’s cash to market value is more than 20%.
In October, the company skimmed about $11 million from its coffers to pay for Canada’s Yaletown Technology Group. Yaletown makes software that helps companies comply with the Sarbanes-Oxley Act and other regulations.
During a conference call with analysts last year, Edward Maguire of Merrill Lynch & Co. asked about FileNet’s cash and whether there might be a share buyback in the works.
Chief Financial Officer Sam Auriemma said there were discussions with the board and that “we’ll continue to evaluate that as we go forward.”
Fast forward to an analysts’ call in April, and a similar question got a similar response,even as the company’s cash reserves had grown.
“At the right time, we’ll take some action with the cash,” Chief Executive Lee Roberts said during the call. “We’re selectively looking right now at potential M & A; targets that make sense.”
A share buyback might make sense at some point, Roberts said.
Other Companies
Other companies are spending.
Data storage networking products makers Aliso Viejo-based QLogic Corp. and Costa Mesa-based Emulex Corp. have spent tens of millions to diversify their customers and products with acquisitions.
Aliso Viejo-based Quest Software Inc., which has about $150 million in cash, has a track record of buying companies to keep it ahead of its competition.
The buying is more selective than during the tech boom, L.E.K. Consulting’s Mallette said.
“That’s one of the good things about where we are today,” he said. “We see many companies being much more disciplined about investing. I think boards are looking much more closely, and saying, ‘We’re not making a zillion-dollar investment that isn’t quite clear on its (returns).'”
Still, companies have to buy to keep investors interested, Mallette said.
“A company with no growth is just a bond,” he said.
