Wednesday, October 21, 2009

Can I Get My Honorary PhD Now?

Which tech company is most cash rich: Apple, Microsoft or Google? Having tons of cash in reserves gives them a lot of clout, always on the lookout to buy companies that can add value to its R&D or product mix. The reason why they have so much cash is that they have the structure or products or patents that keep generating massive amounts of free cash flow to the reserves. Now, why would they not give it back to shareholders? We can debate this till the cows come home - a company, in particular a tech company, needs the cash to invest in R&D, to keep pushing the line on innovative products, they need the cash to compete with new technologies or disruptive technologies, and when they cannot compete... they can use their cash to buy the competition out.

One good thing about these 3 companies, there will not likely be a rights issue anytime soon. You invest in a company for growth, not for dividends.

The chart below from Gridstone looks deceptive if you only look at absolute cash holdings. One should look at the number of shares issued and the actual Cash Per Share. Even that is not good enough, to throw a better light at it, the net cash per share should be cited as a percentage of the most recent market share price.

Total cash at at Oct 2009: $21.99bn
Shares Issued: 316.5m
Market Cap: $174.6bn
Cash per share: $69.43
CPS/Mkt Px: 12.6%

Total cash as at Oct 2009: $29.9bn
Shares Issued: 8.9bn
Market Cap: $234.97bn
Cash per share: $3.356
CPS/Mkt Px: 12.7%

Total cash as at Oct 2009: $24.22bn
Shares Issued: 895.82m
Market Cap: $178.0bn
Cash per share: $27.039
CPS/Mkt Px: 13.6%

Here lies the interesting finding, the cash on hand for each of these companies IS NOT AS RANDOM as you might think. There is obviously some "finance strategic" modeling behind it. Cash per share as a percentage of its share price CANNOT possibly be between 12.6% to 13.6% among these 3 companies by chance, obviously they benchmark against each other for competitive reasons.

Benchmarking is just one aspect, could this be the "optimum" cash holding level for companies that have a high propensity to do M&A as a major part of their corporate strategy? Looks that way as having that optimum cash cushion will allow them to act very fast, either in paying cash upfront in a desperate bidding war, or even raising double or triple that cash level from short term lending - which banks will not lend to these 3 companies with such a cash backing? All said, each of these are primed to ACT should they come across a significant major company for sale. Imagine Apple or Google buying Nokia ... Nokia has a market cap of $49.27bn. Say they pay a 30% premium to take over the company, it would cost $64.05bn in value. They need a warchest to at least buy up 51%-100% in case all shareholders accept their offer. No problem, with their cash back, they can easily raise the funds within hours literally.

Lastly, the reason why they such a similar level of cash per share as a percentage of their share price is to FEND OFF the vultures. They can use the cash to buy back shares if they want to, and cancel them as well. By benchmarking with each other, none of the companies would appear to be "too attractive" to vultures - imagine if one of the company has a ratio of 25% instead of 12.5%-13.6%, private equity mega houses may gang up to raid the companies or greenmailing them.

Can I get my honorary PhD now?


p/s photos: Elanne Kong Yuk Lam


The Contrarian said...

Dali, I'm not a finance whiz or genius but I'm troubled by how media can guarantee a swap valued at 2 dollar when it's 1:1 swap? Wouldn't media be subject to market fluctuation and this would expose nstp
holders for the exercise to market risk??? Pls correct me as I feel this deal is unfair!!!

Hawk said...

dali, it has no use even you have double PHD if you cant make money. i would rather street smart.

btw, i wish to check with you, why is it that recently there are so many rights issue undertaken by PLC?

clk said...

Just looking at Microsoft vs Apple, I would have thought they'd be a mile apart but their financials are obviously not too far despite huge difference in market share.

One is possibly 9x larger than the other.

Goes to show market share means nothing!