Facebook, Apple and other technology heavyweight stocks dropped on Wednesday. Is the tech stock rally over?
BIG tech companies face a high-quality problem heading into the new year: All that money, and not much good to do with it.
Passage of Republicans’ ambitious tax plan theoretically frees up more than half a trillion dollars that U.S.-based tech companies have stashed overseas. It’s a considerable sum—the nine tech companies with the biggest offshore bank accounts are currently sitting on a combined $632 billion, which is about 15% of their combined market cap. That’s also nearly half of what Moody’s estimates will be the total offshore cash pile of U.S.-based nonfinancial companies by the end of this year.
Money to burn, in other words. But despite fantasies that such a windfall will fuel a boom in merger activity, the reality will likely prove far less exciting. Big tech companies, as it turns out, haven’t really needed the money.
Companies already inclined to dealmaking haven’t been constrained by the growing pile of cash trapped offshore. Low interest rates and strong cash flows have provided plenty of fuel to date. Microsoft, with $132 billion overseas, didn’t wait for a tax break before its $26 billion purchase of LinkedIn last year. Qualcomm has already committed its nearly $30 billion offshore pile to its planned pickup of NXP. And Internet giants Amazon.com, Facebook and Google-parent Alphabet Inc. still enjoy strong growth in their core businesses and are unlikely to be rewarded by investors for big-ticket M&A.
Exceptions could be Cisco Systems and Oracle, which have been fairly acquisitive but still have large legacy businesses that are a drag on growth. The two have $69 billion and $59 billion offshore, respectively. But they would also be shopping in an inflated market; the S&P 500 Software & Services Group is up 38% this year, and many of the cloud-computing companies the two might consider buying have surged more than 50%.
Most of the freed-up cash will most likely go back to shareholders. Following a tax holiday in 2004, U.S. companies put 94 cents of every new dollar toward buybacks or dividends, according to a study National Bureau of Economic Research.
And then there is Apple Inc., which alone sits on more than one-third of tech’s offshore cash pile. The iPhone maker has never had a taste for big deals, but it has managed to run up $116 billion in debt over the last four years, essentially borrowing against its cash trapped offshore to pay for its buybacks and dividends. The company is likely use at least some of its repatriated funds to pay down that debt. Not the most exciting way to blow a Christmas bonus. - WSJ
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