Meet Tech's Cash-Rich Royalty


By Steve Rosenbush They're the titans of tech cash. At a time when Corporate America is rolling in dough -- and tech companies have amassed well more than an equal share -- a handful of hardware and software leaders have built fortunes that are truly for the ages (see BW Online, 6/20/05, "Tech's Idle Billions"). Here's a look at the royal court of techdom and how its lords are likely to spend their treasures:

The ne plus ultra of corporate wealth (cash stash: $38 billion):

After years of crossing swords with rivals and regulators around the globe, Microsoft (MSFT) is richer than ever. Last year the fortune peaked at $75 billion. That was more than enough even for Chairman Bill Gates, who insists on maintaining a horde comparable to an entire year's worth of revenue.

He had enough for two, and some experts were worried that the government would reclassify the software titan as an investment company if it didn't return some cash to shareholders. So Microsoft declared a special dividend worth $32 billion, and Gates promised to give his personal $3 billion windfall to charity.

The company also boosted its quarterly dividend to a total of $3.5 billion a year, and it promised to buy back $30 billion of its shares, which is another way to put cash in the hands of its investors. Even now, Microsoft has $38 billion in the bank, putting it in a class by itself. Incredibly, it continues to generate an additional $1 billion in cash every month.

What will Microsoft do with all that money? It'll likely continue to boost its dividend and buy back shares. And it's likely to make acquisitions, too. According to a source close to the software giant, it's in talks to acquire Claria, which makes ad-displaying software that people often download without realizing its purpose.

His royal highness' imperial standard bearers (cash stash: over $10 billion each):

It shouldn't surprise anyone that Intel (INTC) has built the second-biggest fortune in tech, although it has less than half of Microsoft's cash. Gates's partner in the "Wintel" team has built up $16 billion in the bank, amid rising demand for its computer chips. Intel has used its cash somewhat more aggressively than others. It has boosted spending on research and development from $4 billion in 2000 to $4.8 billion last year, and it's on track to spend $5 billion this year.

Intel is also investing in new wireless technologies like Wi-Fi and WiMax, and it's starting major capital projects. They include manufacturing plants in Ireland and Chandler, Ariz. And the chip giant is pushing into virgin terrain: On July 6, it announced that it has formed a new company, ClickStar, with actor Morgan Freeman's production company, Revalation Entertainment, to distribute first-run movies over the Internet.

Computer giant Hewlett-Packard (HPQ) isn't too far behind. Despite its messy acquisition of Compaq, a bruising rivalry with Dell (DELL) and IBM (IBM), and the departure of CEO Carly Fiorina, HP has built up a cash balance of $14 billion. That's a lot of money for new CEO Mark Hurd to have on hand. He's focused on cost cuts right now, but he's likely to turn to acquisitions in markets like software and services to boost growth.

It might surprise telecom experts to see Motorola (MOT) keeping such company. The cell-phone maker was getting clobbered by rivals like Nokia (NOK) not too long ago. But Motorola has benefited from the wireless market's spectacular growth. And new CEO Ed Zander has helped it capitalize on that growth by improving product design and getting handsets to market faster than before.

The spin off of its chip unit into a public company called Freescale (FSL), also helped contribute more than $1.5 billion to the $11.3 billion cash horde. Motorola is likely to keep making acquisitions. In June, it acquired engineers and patents from Sendo, the British cell-phone company that ran into financial trouble.

The monarchs of moolah (cash stash: $9 billion to $10 billion each):

IBM and Oracle (ORCL) are big companies in need of growth. Oracle, with $9 billion in the bank, has demonstrated that it plans to be a consolidator in the software market. It focuses on buying smaller companies with lower profit margins and improving their financial performance by eliminating overlapping costs, such as administration and sales. Oracle acquired rival PeopleSoft for $10.3 billion, all in cash, in January. On July 5, it announced it would buy privately held ProfitLogic, which sells software to the retail industry.

IBM, which sold its PC division to China's Lenovo last year, will use its $8.6 billion for growth-oriented acquisitions, too. It's focused on emerging markets such as India, China, and Eastern Europe.

Dell reflects a more conservative approach to managing cash. With a minuscule R&D budget and a bias against big acquisitions, Dell can be expected to return much of its $9.8 billion to shareholders. It announced this spring that it would use $2 billion to buy back shares. Dell does have some capital projects in mind, though. It will invest money in a manufacturing site in Winston-Salem, N.C.

The dukes of dinero (cash stash: $5 billion to $7 billion each):

Networking giant Cisco Systems (CSCO) barely made the list. With a mere $5 billion in the bank, it has less cash than Apple (AAPL), which has a robust balance of $7 billion and is likely to invest in the development of more hot products, like its iPod. Even Applied Materials (AMAT), which makes equipment for cleaning semiconductor plants, has racked up more cash than Cisco, at $6 billion. In June, Applied Materials used an undisclosed amount to buy SPC Global Technologies, which provides cleaning technology for chipmaking gear.

It's a given that Cisco will continue to make small technology acquisitions, as it has in the past. In recent days, its stock price has fluctuated because of market rumors that it's in talks to buy computer storage company EMC (EMC). Such a deal would make sense, according to analyst Bill Whyman of researcher Precursor Group. He thinks storage is a logical extension of Cisco's networking business and that the deal would promote growth over the longer-run.

A source close to Cisco, however, says the EMC rumors are off base because Cisco doesn't want to stray from its current acquisition strategy of buying smaller companies that are close to corporate headquarters in Silicon Valley.

The real question is whether Cisco, which epitomized the tech boom of the late '90s, is going to jump on the dividend bandwagon. It would be a huge reversal for such a growth company to give back money to shareholders, because it would mean it couldn't find enough growth markets to use all of its cash. If Cisco takes that drastic step, "it would be a sign for everyone else to jump in and start returning cash to shareholders," says Pip Coburn, tech analyst with UBS.

Over the next few years, the pressure on tech companies to return cash to shareholders will just get stronger. It makes good sense. As even the most powerful emperor knows, it's important to keep the royal subjects happy and well fed.

Rosenbush is a senior writer for BusinessWeek Online in New York


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