Silicon valley is being flooded through by a torrent of cash
CALIFORNIA itself may be on the brink of bankruptcy, but its most famous Silicon Valley firms very much are not. By one estimate, the top 15 most capitalised technology firms have $316bn (£203.6bn) of cash and short term investments racked up.
Apple, now the world’s second largest company by market capitalisation, has about $50bn in the bank. Google has $33bn and Microsoft has $43bn. That is fuelling a wave of optimism about the possibility of share price boosting dividends, share buybacks, as well as expectations of a flurry of mergers and acquisitions. Is it time CFD traders joined in?
Certainly, it looks like an exciting time for the technology sector. Ben Rogoff, fund manager of the Polar Capital technology trust, reckons that 2011 should see continued volatility among technology stocks. “It is quite telling which firms have the cash piles” he says, “it’s an indicator of how with it a firm is”.
Rogoff reckons that firms which have spent a large amount on acquisitions like IBM and Hewlett Packard, have been forced to do so to deal with a rapidly changing industry, whereas firms like Google and Apple have succeeded in generating innovation themselves, and so have been able to hoard money. Traders might want to stick with the wealthy companies then
HUGE BUYBACKS
That may be at an end now, however, as all firms branch out. Texas Instruments announced a huge $7.5bn buyback of shares in September, or approximately 25 per cent of the company’s market capitalisation, pushing its share price up by about 26 per cent. Though neither Apple or Google looks likely to start paying dividends, they may splash around some money on acquisitions.
According to Rogoff, it would make sense for Apple to buy Adobe, a software company. Google, for its part, has already been opening its wallet. Last month, it reportedly offered $6bn for Groupon, a “social purchasing” site. It was refused, partly due to the anti-trust concerns which have intensified around Google of late.
Microsoft is another large firm which may embark on a spending spree. Over the last year, the technology giant has seen its share price slip back by 8.26 per cent, suffering from its dependence on relatively stagnant business software revenues. It may choose to make some spectacular acquisitions so as to reinvent itself and find new revenue streams.
PARADIGM SHIFT
According to Sean Murphy, a partner at Norton Rose who specialises in the technology sector, the IT industry is undergoing a paradigm shift.
“Sections of the technology sector are converging and it’s all becoming increasingly competitive” he says. As a result, firms that have been exceptionally conservatively managed since the late 1990s are now being forced to spend so as not to miss out on consumer trends.
According to Murphy, the main reason acquisitions haven’t already happened is confidence. “After Lehman fell, lots of people thought that companies would take advantage, but that didn’t happen – actually, activity fell.” With confidence now picking up again, many firms may feel forced to start running down their cash balances – as appeared likely in January 2010, before the Greek sovereign debt crisis depressed confidence again.
So how should traders react to this? Unfortunately, it’s far from clear. Part of the reason why companies like Apple and Google have accumulated such dramatic cash hoards is because they have been considered growth companies. Many investors might not take kindly to large acquisitions.
In that case, it might make sense to go short on the wealthiest firms, while buying up the firms likely to be acquired. Alternatively, given the potential cash about to be flashed, it might make sense to go long on the Nasdaq, in anticipation of a round of price boosting deals.
One thing seems relatively certain, however. One way or another, the technology sector is likely to excite more than most in 2011. Traders should keep watching their screens.