NW100: The billion dollar club

Some top Network World 100 companies have stockpiled cash reserves that would make any miser proud. But could they be putting their money to better use?

In the 1861 classic English novel Silas Marner, George Eliot created the archetypal money lover. Marner spent his evenings alone, in the dark, counting his hoard of gold. A look at the NW 100 confirms that Marner isn't alone in his love for cash.

Specifically, 16 companies surpass $US1 billion in cash assets.

Nearly half of those have accumulated $US2 billion or more, with Microsoft surpassing them all.

The software maker has almost $US14 billion cached (pun intended). Intel lands in second place with more than $US7.6 billion, and IBM is in third with $US5.7 billion.

When factoring in the debt of these billionaire savers, another miser appears: Novell. Novell has kept $US1 billion in ready money for years now and owes virtually nothing.

That kitty is just about equal to what Novell earned last year -- its 1998 revenue reached $US1.2 billion -- and adds up to twice as much as a software company its size typically stashes.

Now how many of you can manage to keep a year's wages in the bank, debt-free?

"If you look at the leading technology companies and compare, whether you're looking at cash to total balance sheet or cash to revenue, [the analysis] says we should have about $US500 million in the bank," said Dennis Raney, chief financial officer of Novell. "But we have not had any negative comments about having too much."

On the contrary, Raney and analysts say. Novell's available cash has contributed to its comeback -- proving to shareholders, analysts and customers that the company "had the resources to execute its turnaround plan", Raney said.

A turnaround that, by all accounts, Novell accomplished last year.

And for companies such as Novell in defensive, rebuilding mode, survival depends on "maintaining an adequate cushion to fund cash flow", said Nat Burgess, senior vice president of Corum Group, a software merger and acquisition boutique.

But is too much cash ever a bad thing? Well, it's never actually bad, financial analysts say, but hoarding isn't the best choice.

In fact, Microsoft has taken some heat in recent months over its $US14 billion in cash and liquid investments.

The argument is that the company could be doing more with that money, said Michael Wieberg, equity research analyst for ING Barrings, an investment firm.

Given that Microsoft doesn't pay dividends, it's a valid argument.

"The assumption is that a public company should put the cash to work, either in dividends or acquisitions. Microsoft should have better things to do with that money than letting it sit in the bank," Wieberg said.

What the company will spend that cash on is the question. Currently, Microsoft's main focus for the money is buying back its stock, mostly to continue offering it to employees -- a huge bargaining chip in today's fight for top talent. Likewise for Novell, which is buying back 10 per cent of its outstanding stock.

As for the rest? Some wonder if Microsoft is keeping itself ready for a large cash payout settlement that could result from its legal troubles. Maybe, but experts speculate that such a payout would hardly reach $US14 billion. Or Microsoft could be banking on the possibility that the Department of Justice will break up the company, in which case its splinters would need cash to reorganise. Microsoft isn't saying.

On the other hand, some equity experts contend that a better way to assess cash is to compare it to overall assets, rather than revenue, said Gary Wiebke, editor of the Armchair Millionaire Investor Center.

For instance, Microsoft currently has $US14 billion in cash and liquid investments and $US22 billion in overall assets. So slightly less than half of the company's total worth is in cash.

While the amounts have been rising, the ratio of cash to total assets has been roughly stable. In 1997, for example, Microsoft had $US9 billion in cash and $US14 billion in total assets.

Moreover, Microsoft's is the fastest growing stock, so "it's hard to claim it should be doing more for its investors", contends Wiebke, adding that the company will unquestionably do something with the money.

"But to second-guess Microsoft management and say it isn't doing enough -- I think it has earned the benefit of the doubt."

Furthermore, Microsoft isn't really 'saving'. Instead, it's earning faster than it can spend.

Part of that is the nature of the software business, which has very little overhead compared with other technology businesses.

So the same accusations of lackadaisical money management aren't hurdled at, say, Intel with its $US7.6 billion stash.

The operating costs of a semiconductor business are huge, said Greg Mischou, senior semiconductor analyst for investment bank Warburg Dillon Read.

For instance, today's state-of-the-art fab (fabrication plant) costs $US1.5 billion to build.

"In the future, the cost will go up dramatically. For a future 300-millimetre fab, the cost will exceed $US2 billion," Mischou said.

Moreover, revenue streams are cyclical. A company like Intel needs to hang on to its money to pay its bills through those slow times.

As for the rest, a savvy cash-heavy company will spend on acquisitions.

In fact, other than Intel's stock buy-back program and operating needs, that's the target of its leftover funds.

The company's cash position lets it make acquisitions and grow new areas of business. Intel has announced a number of acquisitions in the network area -- Case Technology, Dayna Communications, iCat, Level One Communications and Shiva.

The bottom line is: too much cash is a nice problem to have.

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