Sunday, June 11, 2017

Tech firms' cash pile

Infosys, TCS, Cognizant and other Indian IT firms have had to take tough questions from investors on the cash pile they have been sitting on for years. This pile produces low returns from investment in bank deposits and the rest. Investors think if the firms have no investment avenues for the pile, they should return much of it to investors. At long last, the tech firms have said yes.

Huge cash piles are not limited to Indian tech firms.Schumpeter points out that the top five tech firms of the world- Apple, Alphabet, Microsoft, Amazon and Facebook- are sitting on a net cash (cash minus debt) pile of $330 bn, twice their gross cash flow. This is set to touch $ 680 bn by 2020, three times their cash flow.

One reason for the cash pile is that much of it is stashed away abroad and not brought back to the US in order to avoid tax. But the tax bill by itself does not justify the cash hoard. Another reason is having to making large investments in R&D. The five tech firms spent $100 bn on investment last year. For them not to grow their cash pile, Schumpeter estimates that investment would have to rise to $300 bn. That is a staggering figure by any reckoning:
That is over twice what the global venture-capital industry spends each year. It is 51 times the annual cash burned up by Netflix, Uber and Tesla, three firms famous for being cash hungry. And it is 37 times the average annual amount of cash the five firms have in total spent on acquisitions to gain new technologies and products, such as Facebook’s $19bn purchase of WhatsApp, a messaging service in 2014, or Google’s $3.1bn acquisition of DoubleClick, an advertising firm, in 2007.

What could be the reason then for the cash pile? Schumpeter reckons that uncertainty about future profit could be a factor. The tech firms probably reckon that the cash pile may not grow as much as projected now, given that various threats could emerge. But if they do manage to add on to their cash they may diversity in a big way into cars, media or hardware firms. 

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