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Tech Industry

Perspective: Waiting for the Greenspan effect

Banking expert Tom Taulli says the Fed's liberal monetary policy will force tech companies with large amounts of cash to put their money to work elsewhere, which could trigger a realignment in the industry.

    Cisco Systems shareholders recently proposed to have the company pay a quarterly dividend. With $21 billion in cash and a much-diminished stock price, a dividend looked like a good way to boost investors' rate of return.

    Calls for dividends are always the hallmark of a hellish bear market and traditionally a sign that the market has hit bottom. True, Cisco's CEO, John Chambers, said he would entertain a dividend if Congress repeals double taxation on dividends and if his investors voted "yes." It was a classic move from Chambers, who always plays chess several moves ahead of his opponent. In the shareholder vote, Cisco investors voted against the proposal by a 10-to-1 margin.

    What is Chambers' real motivation? For starters, we can look at finance theory. If a company has little growth opportunities, a smart move would be to give back the money to shareholders. After all, the money belongs to them, right? And they can take their money and find better uses for it.

    Finance theory seems to be borne out in the real world. For the most part, companies that pay dividends tend to be in mature industries, such as utilities, oil and so on.

    Deep down, Chambers knows that his company--and tech in general--is not at the twilight of growth. Rather, tech has been dealing with the aftershocks of a mania. It's a short-term action in which markets exact brutal efficiency. In the long term, technology is inherently a growth industry.

    Cisco is not alone. Microsoft, Intel and Sun Microsystems have large amounts of cash. They, too, must make decisions about what to do with their treasure chests.

    Deep down, Cisco?s Chambers knows that his company--and tech in general--is not at the twilight of growth.

    Interestingly enough, the situation is not concentrated in the blue-chip tech stocks. In fact, there are a myriad of small tech companies with large amounts of cash. Akamai Technologies has $142 million in cash; ValueClick has $263 million in cash; Ariba has $245 million in cash; and Aether has $373 million. The list goes on and on.

    The wealth of the dot-com era did not suddenly disappear. It still exists and is in the corporate bank accounts of many small public companies.

    Several years ago, Barron's wrote an influential piece that detailed the burn rates of Internet companies. It was certainly scary for investors and marked the end of the "Bubble Era." While many of the companies on the list went bust, some survived. These survivors were able to raise huge amounts of money from IPOs and secondary offerings--and did not blow the money on Super Bowl commercials and crazy ventures.

    Since 2000, the survivors have taken great strides in focusing their business models and reducing their operating expenses. Now these companies are starting to show real profitability. But cost cutting has diminishing returns. At a certain point, the cuts hit the bone and can damage a company?s long-term viability. Moreover, IT spending is likely to be muted during 2003, which makes it tough to generate top-line growth.

    The wealth of the dot-com era did not suddenly disappear. It still exists and is in the corporate bank accounts of many small public companies.

    And there's another problem: Alan Greenspan. With his liberal monetary policy, tech companies have large cash holdings that are earning negligible returns.

    What is a company to do? It can repurchase stock, which many tech companies have done. This reduces the number of outstanding shares, which helps boost earnings per share. It also provides demand in the marketplace, which should mean a higher stock price. But a company can do something else: buy other companies. Mergers and acquisitions have definitely become discredited. Shareholders have suffered great losses because of deal making, such as at WorldCom, Vivendi and Tyco.

    The problem is that we are using yesterday's examples for today's situation. In the current environment, valuations are much lower and companies have streamlined their operations. Companies that have lots of cash do not have to use their devalued stock prices to buy companies.

    With cash earning 1 percent, the hurdle rate for a successful acquisition is not difficult. The formula is simple and compelling. CEOs and CFOs cannot ignore it. So do not be surprised if we see a rush toward mergers and acquisitions in 2003. It looks all but inevitable.