Is Carl Icahn ready to take a pop at Silicon Valley’s flabby balance sheets? The veteran shareholder activist’s $110m stake in Symantec could simply reflect a view that the shares are undervalued. But, even after its recent buy-back plans, the cash generative software group would have room to return more to shareholders.
Either way, pressure is likely to keep building for technology companies to answer the question of how to structure balance sheets in today’s slower growth environment.
Until now, most have been loath to return their cash mountains to shareholders. Given the rapid technology shifts that can occur, executives have enjoyed the security of big cash cushions. Strong balance sheets also provide flexibility to invest in new opportunities.
But as many areas have matured, profits have become somewhat more predictable and the number of new high-return investment opportunities has diminished. The excuses for hanging on to cash have started to wear thin, especially for companies that can easily fund research and development needs out of cash flows.
Things are beginning to change. Microsoft paid a special dividend – although this hardly dented its formidable balance sheet. Others, such as Oracle and Cisco, made big acquisitions for cash instead of paper.
However, Goldman Sachs estimates that the technology sector could still return $118bn if major companies restructured their balance sheets. This would enhance stated returns. After all net cash, offering puny returns, represents more than 10 per cent of sector market capitalisation.
The challenge for many will be how to rejig their balance sheets without worrying the market they have run out of ideas.
Some should simply accept reality, and focus on returns because their market segment has gone ex-growth. An efficient capital structure and emphasis on cost control could make a big difference.
But there is a risk that a number will make questionable acquisitions to prove they have a healthy future and to help get rid of the cash burning a hole in their pockets.