Comment by boxy310 | Hacker News Reader

Comment by boxy310 | Hacker News Reader

There was a very interesting article in the NY Times earlier this year about this subject:

"For other industries, though, a dollar of savings is worth a lot more than itself. For pharmaceutical companies, a dollar in savings is worth $1.50. For software firms, it’s even higher: more than $2. This means that investors are behaving as if they trust the executives in these industries, like Larry Page of Alphabet, to be smarter about using that money than the investors themselves could be. ...

"Why? The answer, perhaps, is that both the executives and the investors in these industries believe that something big is coming, but — this is crucial — they’re not sure what it will be. Through the 20th century, as we shifted from a horse-and-sun-powered agrarian economy to an electricity-and-motor-powered industrial economy to a silicon-based information economy, it was clear that every company had to invest in the new thing that was coming. These were big, expensive investments in buildings and machinery and computer technology. Today, though, value is created far more through new ideas and new ways of interaction. Ideas appear and spread much more quickly, and their worth is much harder to estimate."

Source: http://www.nytimes.com/2016/01/24/magazine/why-are-corporati...

The implication is that big tech companies see some very disruptive trends coming down the pipeline, but they're not sure which specific idea or ideas should take most of the investment, and they're hedging their bets by hoarding cash for now. Maybe when the AI/automation revolution kicks into high gear, we'll finally see what they spend all this money on.

I like Warren Buffet's phrasing as cash is a call option with no expiration date. Standard finance theory is that companies should either invest the cash themselves, or if they can't find good investments, they should return it to their shareholders so the shareholders can deploy it elsewhere. However if the management of these companies thinks that the ultimate return on the cash they hold will be greater even given the time value of holding a zero-return investment for years then it makes sense to wait to deploy. I happen to think they're wrong and that they'd be better off returning most of the cash to their shareholders but that's for the respective boards to decide.

There is a real weight of gravity around that much cash. I would guess the returns of having 10x the cash of your nearest competitor, and publicizing that fact exceeds T-bill returns for instance.

Yeah true, and Apple's "Cash" isn't just cash but likely includes tons of government debt and other low-risk securities that return somewhere >0. They have an exceptional treasury team, which probably my favorite fun fact about Apple, operates a separate company called "Braeburn Capital".

Article about their cash woes when they "only" had $120B to invest: https://www.theguardian.com/business/2012/oct/26/apple-inves...

Apple was an outlier in this sense, because for the longest time they were sitting on a mountain of cash. They ended up paying part of that out as dividends when Cook became CEO.

Something I don't understand: why would a company ever return cash if they don't have to? Isn't it better to have it than not?

Well they do have to return the cash if the shareholders demand it since the company doesn't own itself, the shareholders own it.

Think of the "company" as fictitious. All the company is, is the combined assets of shareholders. So the shareholders decide if they would rather have the cash in the corporate entity or in their own pockets.

There are several reasons.

A couple could be shareholders believe they have better uses for the money elsewhere and to keep management disciplined (i.e. too much cash makes management reckless).

Think about if you were a partial owner of two businesses. One business has a lot of cash but isn't growing. The other business is growing but doesn't have a lot of cash. As a partial owner, what would you do?

Because it used to be that companies that don't return dividends back to share holders weren't worth much. What's interesting is microsoft's sales in 2005 and 2015 are both 12B. The other companies at least have none flat revenue numbers.

If a company has excess cash, and few good projects (NPV>0), returning money to stockholders (dividends or stock repurchases) is GOOD.

If a company does not have excess cash, and/or has several good projects (NPV>0), returning money to stockholders (dividends or stock repurchases) is BAD.

Read more here: http://pages.stern.nyu.edu/~adamodar/New_Home_Page/lectures/...

Shareholders get nervous when companies hold too much cash, because they fear that management will blow it on stupid acquisitions. This ultimately hurts the value of the company.

Management is usually granted stock and/or stock options, which aligns their interest with the other stock owners.

Warren Buffet's genius idea is to have his insurance companies producing steady flow of incoming cash in both good and bad times for him to invest. He has always cash coming in. Berkshire Hathaway has cut banks and finance sector and their margins out from Buffets investing scheme.

MS, Apple and Google are in different situation. They want to hold cash to protect and grow their network externalities. It's zero sum game in long term.

A serious question: does anyone -- management, shareholders, analysts, anyone in the picture at all -- seriously think that these companies will actually find a way to invest a nontrivial portion of the cash piles they're sitting on? (Bearing in mind that to date, year after year after year, they're unable to invest quickly enough to prevent the pile from continuing to accumulate, let alone spend it down.)

Have there been any incredibly disruptive & profitable markets in the past 10 years? Would hanging onto cash help solidify your place in the next disruptive & profitable market? At the end of the day, the question for these companies is: can you afford not to have cash available for The Next Big Thing?

Smartphones have exploded in the last 10 years....

and yet Microsoft has been unable to use their cash to secure a foothold in the smartphone market.

My understanding is they get ~$1 billion/year from licensing patents to Android manufacturers.

Anyway, I wouldn't count them out just yet. It took them 5-6 years to catch up to Google Docs and these days, I often consider using Office 365 because it's local AND syncs to the cloud automatically.

Smartphones have exploded in the last 10 years...

The lithium ion battery problems are mostly under control now.

There's cash available for The Next Big Thing, and then there's $215B (Apple's current cash). They could buy, say, GM outright (market cap: $48B) and barely make a dent.

I think the whole Apple car rumor is analysts trying to come up with a conceivable way they could spend a large portion of their reserves.

There is still something very apple-ish about that rumor. It might seem weird, but cars are becoming more like mobile phones with wheels. The mobile phone is the latest in the personal computing vision apple had (well, jobs). The car being an extension of that might be a natural choice for them to follow. A self driving car that picks you up whenever and wherever is to the car what the smartphone is to mobile phones. Who knows? They have the money and talent for a good effort.

I think the rumor has some merit though.

Apple now have their own mapping effort similar to Google and I remember watching a video at a Google sponsored event where it was mentioned that for self-driving cars to be viable, you first need a mapping solution which Google had been building for several years as Google Maps.

They do, if though nothing else then through multi-billion acquisitions. Another thing is that we all know crises come every now and then. Being tight on cash when it hits the market means you'll have to let talent go to your competitors, slow down infrastructure growth, reduce research freedom.

Sure, these are reasonable arguments, which are commonly used. Clearly this justifies holding on to some cash. But I question whether it justifies holding on to this much cash. At some point it has to reach diminishing returns.

The problem with spending it on acquisitions is once you reach a certain size buying other companies becomes difficult due to regulatory concerns.

Alphabet seems to be starting to find a way. Say they have a working, regulatory approved self driving car, it'll take tons of money for scaling. Same for internet balloons, and probably other stuff.

They have enough experience with Google Fiber now. If they really wanted to put some of that cash to work they could start building fiber networks in 10 cities per year and blanket the top 50 metro areas (just to side-step arguments about how big the US is and the expense of deploying to rural areas).

The reality is Google Fiber exists to scare the existing players away from squeezing too hard, but not as an actual plan to create a large profitable business to deliver actual competition. Google has orders of magnitude more capital than they would need to do that if they wanted.

I'm only guessing,but since Google has no big advantage in the field of fiber, it means that their business there won't have decent margins(or returns-on-capital) like they are used to - which would make them less interested.

Also another reason they may worry, is that maybe phased-array antennas may become competitive soon, so investing on fiber for the long term might be risky.

On the other hand, stuff like self-driving cars should have a different competitive/economic story, so scaling may look different.

I'm very worried those next big things aren't coming. If they do, they'll come from China and not the US.

Why? The low government spending on R&D, from the US. So much technology came from government R&D. I just don't think private R&D is enough for the "next big thing".

Yet according to the article the vast majority of their holdings are trapped overseas because of onerous taxing principles, the US being one of the nations to tax companies for profits regardless of where.

Of course with this much overseas and its increasing value how much must be stashed before you exceed the value of the company in question. On a completely different tangent, how much does it take to intimidate your competition to nothing in fear you are waiting to jump?

I understand their motivation - just like I understand Hitler's motivations.

Hoarding cash is extremely bad from a macro-economical standpoint. The govt should be alarmed of this type of development.

There is a reason why we need 2% inflation - it is to push people with money to spend it or risk loosing its value. Its what keeps the economy churning and keep people employed.

This massive cash hoard is essentially one entity holding on to all the gold in the kingdom - resulting in deflation in the rest of the economy.

These companies are waiting for a disruption, and will just use their cash hoard to buy the company that threatens their monopoly ? How is this not a massive issue of anti-trust ?

Godwin's law kicked in again. I am impressed how it makes its way into every discussion.

additional benefit of inflation: it makes existing debts easier to pay as time goes on, thus reducing the probability of a default (or a large collection of simultaneous defaults). that is, a small positive inflation rate is good because it means we aren't having deflation, which makes debt harder to pay off.

> it is to push people with money to spend it or risk loosing its value.

and yet, what these big, very smart companies are doing is not investing. they're just sitting on it.

it seems a positive inflation rate, as an economic growth strategy for a nation, can only do so much. it's also helpful if companies and investors actually see some enterprises or industries worth investing in, or worth creating from thin air, in the current economic environment.

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