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Tuesday, April 27, 2010

Cash-Rich Tech Companies Avoid M&A Path

Financial Times

A handful of the largest US technology companies have increased their cash mountains by 40 per cent over the past year, taking their reserves to nearly a quarter of a trillion dollars, according to figures released in recent days.

Conservative balance sheet management in the face of economic uncertainty and the failure of an anticipated wave of mergers and acquisitions to materialise have resulted in a massive build-up of liquidity among a small group of leading companies.

The 10 largest tech companies added more than $65bn to their reserves since the depths of the slump a year ago, according to a Financial Times analysis. That has come in spite of declining revenues over that period at companies such as Microsoft, Cisco Systems and IBM.

Rising competition in some big tech markets, such as mobile computing, has also led the largest companies to hoard reserves, led by Apple, now the richest tech group with nearly $42bn in cash and investments.

Tech executives such as John Chambers, chief executive of Cisco, had predicted that last year’s slump would lead to a shake-out in the industry with financially stronger companies looking to do deals.

Few companies were prepared to sell as share prices hit their lows, however, and the speed of the turnround in tech stocks has now made big deals less attractive.

Paul Jacobs, chief executive of Qualcomm, the world’s largest maker of wireless chips, said last week that his company had stepped up the number of small deals it carried out as it looked to acquire new technologies. But he added that bigger potential acquisitions looked too expensive.

Other groups, such as Google, have increased the pace of their dealmaking in recent months to strengthen their technological capabilities as they seek to extend their reach into new parts of the tech landscape.

IBM said last week that it had pulled off $1bn of acquisitions in the first quarter, mostly for cash, in a deliberate pick-up in purchases of smaller companies.

Overall, however, M&A in tech receded during the slump. The value of global tech deals announced in 2009, at some $125bn, was down nearly a fifth from the year before, according to figures from Thomson Reuters. Even an increase in the first quarter this year still left the level of dealmaking at barely half its level of two years ago, before the recession.

The cash build-up has led some groups to promise a return to larger share buy-backs.