Big Tech Struggles With Cash Flow - Street Voices - WSJ

Having so much money that you don't know how to use it used used to be a big problem. Now that's just a problem.

The biggest tech companies in the world are also among the richest. The parent companies of Apple, Amazon, Microsoft, and Google and Facebook currently hold over 570 billion dollars in combined short- and long-term cash investments. According to data from S&P Global Market Intelligence, this is more than double the sum of the five richest non-financial companies in the S&P 500 index.

This is mainly due to the business model of selling widely used products and services without incurring the exorbitant fixed costs that are common in other industries. Apple, Microsoft, and Alphabet each generated more than 100 billion dollars in cash from operations last year. Oil giant ExxonMobil's operating cash flow for the same period slightly exceeded 55 billion dollars.

That's a huge amount of capital that must be put into work. As regulators in the US and around the world are drawing attention for their determination to stop big tech from becoming huge, implementing this effectively has become an even bigger issue in the past few years. Amazon, Adobe, and Intel have had to rapidly increase acquisition attempts over the past year due to global regulatory resistance. Also, in order to actually close a deal, it takes time and requires expensive lobbying. Microsoft's acquisition of Activision Blizzard took nearly two full years to complete. The next biggest deal, the 2016 LinkedIn acquisition, took just under six months.

Still, piles of unused cash may be widening holes in some pockets. Google is reportedly considering bidding for HubSpot, a provider of cloud-based software used for email marketing and other advertising-related functions. The price of such a deal would probably be over $40 billion. This is a 30% premium added to the market value of the hub spot before Reuters reported Google's interest in the company on Thursday. This is more than three times the size of the 2012 $12.5 billion Motorola Mobility acquisition, which is the company's largest deal to date.

In particular, such a move seems reckless since Google could be seen as further strengthening the $238 billion a year advertising empire that the US government already feels is too dominant. However, even when compared to other super flash tech companies, Google has the most dry powder, and cash after deducting debt on books as of the latest quarter has risen to close to 98 billion dollars. This is double the net cash of Meta Platforms, which is its biggest rival, and greatly exceeds Apple's net cash balance of 64.5 billion dollars.

In response to the fact that Microsoft finally succeeded in clearing the Activision acquisition, Google may also be deepening its confidence. Google general counsel Halima Delain Prado, who spoke at the Bloomberg Intelligence conference on Thursday night, declined to comment on questions about the agreement with HubSpot. However, according to event records, he said that Google is working on products and deals with “the idea that it is necessary to act boldly and responsibly.” Prado further added, “But that doesn't mean the road is always easy.”

It's definitely not easy for Google to pursue a $40 billion deal in advertising. In response to reports from Reuters, Alphabet's stock price fell nearly 3% on Thursday, but picked up partially on Friday. “We're wondering the rationale behind this much-discussed deal and whether this is the best use of capital,” Jefferies Brent Till wrote in a memo to customers on Friday, saying there is a high possibility of a “fierce backlash due to antitrust laws,” and HubSpot's software runs on Amazon Web Services, Google's biggest competitor in cloud computing.

However, there are limited ways to utilize such large amounts of cash. According to FactSet, Google's parent company spent 61.5 billion dollars last year and 59 billion dollars the year before last to buy shares. And even those are controversial. In an antitrust lawsuit against Apple last month, the Department of Justice pointed out as evidence that the company made a share buyback of 77 billion dollars last year, that is, more than double the approximately 30 billion dollars spent on research and development, and pointed out that “the reason Apple itself has lost incentives for innovation is because Apple is in an insulated state.” That in itself takes us away from competition.”

Apple currently spends about $15 billion a year on dividends. However, iPhone makers have long shied away from big deals. The 2014 $3 billion acquisition of Beetz Electronics remains the largest in history. At Apple's 2010 annual meeting, co-founder and then CEO Steve Jobs joked that he blew away the company's then-record mountain of 40 billion dollars in cash at a large party. In fact, this may be one of the most undisputed recent uses of excess capital.

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