The Fearfulness of US Tech Companies

The tech community likes to think it is all about changing the world for the better. But the recent reality is that US companies - and tech, in particular, are among the least likely to invest hoards of corporate cash in order  to grow that global market.

This is not to say that they should be giving money away to the world's poor - though many of them can certainly afford to do so and might even benefit from the effort.

The issue is more that companies are hiding what used to be called risk capital for fear of entailing any risk.

Innovation and growth go to the bold. The future belongs to those who are willing to bet on their belief in their products, services and the potential of new markets. But such thinking no longer characterizes the leaders of American businesses. It may well be that compensation systems have been so carefully designed to assure a certain level of income that those subject to them have internalized that philosophy. It may also be that the uncertainty of technological innovation in a global marketplace has caused some to lose faith in their own ability to predict what may work or not.

But whatever the causes, the result has been an historic accretion of capital which is simply sitting on the sidelines waiting for someone to tell those who manage it that it is 'safe' to deploy it. It is unlikely that such thinking will generate the returns necessary to compete for the future. JL

John Plender reports in the Financial Times:

Corporate miserliness in the US is driven by the technology sector.

All across the world companies have in recent years been hoarding cash, nowhere more so than in the US. For at least a decade and a half, cash has progressively increased its share of the American corporate balance sheet, to the point where US quoted companies have turned into the Scrooges of the global economy. According to research by Juan Sánchez and Emircan Yurdagul of the Federal Reserve Bank of St Louis, their cash hoard had reached almost $5tn by the end of 2011. Such is the scale of this cash pile that the US corporate sector must have been partly responsible for the surge in demand for safe assets and the decline in interest rates that fuelled the US housing bubble. Yet American business has been spared the opprobrium heaped on excess savers such as China, whose official reserves top $3.5tn. There is nonetheless something fundamentally different about the US corporate cash pile compared with those of, say, China and Japan, where burgeoning corporate sector savings have increasingly fuelled global imbalances.

I calculate that the combined cash and liquid investments of Apple, Microsoft, Google, Cisco, Oracle, Qualcomm and Facebook now top $340bn, a near-fivefold increase since the start of the millennium. What differentiates these tech companies from most of the other businesses that contributed to the American corporate cash nest egg is that they have little or no borrowings. In the case of Apple, the build-up of liquidity from $24.5bn five years ago to $129.8bn today would have done credit to the Sorcerer’s Apprentice.

This extraordinary penchant for saving has been antisocial in the aftermath of the financial crisis, when the world was suffering from deficient demand. With many billions of corporate dollars pouring exclusively into money market funds and bonds, the existing fiscal and regulatory bias against equity investment in the US will be given a new twist. Such behaviour also leaves us with a paradox. Why are the most successful and innovative companies on the planet acting like misers in a Balzac novel during a dramatic technological revolution that is leading to the digitisation of virtually everything? How can there be inadequate investment opportunities to absorb all this money, much of which earns a negative real return?

In fact we have been here before. In the 1930s John Maynard Keynes worried that the economy was hostage to the volatile instincts of businessmen. Money’s function as a store of value appeared problematic to him because it allowed entrepreneurs to retreat from investing when confronting uncertainty. And he railed at the capitalist system’s reliance on “the love of money” as he put it, to drive economic growth.
Today it is not individual entrepreneurs who are gloating over their cash. It is more a kind of corporate narcissism. Yet fear and uncertainty have undoubtedly played a part in causing a conspicuous acceleration in saving since the financial crisis. And in a fast-moving globalised market the flexibility that cash affords in the ultra-competitive technology sector matters.

The precautionary motive is not the only spur to cash consciousness. Corporate governance may be a factor. Apple, Microsoft and Google are immune from the discipline of hostile takeover. Many technology companies have a two-tier voting structure that allows founding entrepreneurs to enjoy voting control with a minority of the capital, so they are under little pressure to raise payouts – although the shareholder activist Carl Icahn hopes to squeeze more out of Apple, where he recently bought a stake.

Some argue that because a majority of the cash is held outside the US, taxation is at the root of it. Certainly, tough US tax rules on bringing money home provides an explanation of why cash is not repatriated, but surely not why it goes uninvested. The world’s investment opportunities are not, after all, confined to the US.

The most plausible reason for this corporate thriftiness is surely that information technology, social networks and the rest are driven by human, not financial, capital. Those such as Google or LinkedIn are the very opposite of capital-intensive and the parts of the industrial process that are capital-intensive at Apple or Microsoft are substantially outsourced. This chimes with the fact that the biggest cash hoarders are large research and development spenders.

Such companies resort to the equity market chiefly to provide an exit for venture capitalists or to acquire a currency for takeovers. And they can reasonably argue that it is inappropriate for the owners of financial capital, which is especially abundant in a world of excess savings, to have all the control rights in the corporation when human capital drives growth.
With recovery, the precautionary motive is set to wane, but in this brave new world America’s technology wizards will still be condemned to spew out cash that they cannot absorb in business investment. It is a novel quirk in the workings of late capitalism.