Where's the Cash at HP?

The Wall Street Journal reports that some investors have concerns about the balance sheet at HP.   Many other tech companies have stockpiled cash, while minimizing debt, during the past few years.  For instance,  cash net of debt equals $45 billion for Microsoft, $28 billion at Cisco, and $17 billion at Oracle.  Apple has more than $80 billion in cash and securities on its balance sheet and no debt at all.  Meanwhile, HP has spent a considerable amount of cash on acquisitions in the past year.  Moreover, according to the Wall Street Journal, " H-P has leaned more heavily on borrowing than some other tech companies. Its long-term debt has swelled to $19 billion through the first three quarters of 2011 from $7.7 billion in 2008."

I find this investor concern interesting, given how much politicians and journalists have taken to criticizing many firms such as Cisco and Apple for "stockpiling cash" instead of investing it.   This Wall Street Journal article reminds us of why investors generally like firms to disburse excess cash, but perhaps hold a different view when it comes to tech companies.  In the tech industry, conditions change quickly and dramatically at times.  That potential turbulence and volatility means that keeping leverage low and cash balances strong can make a good deal of sense.   Acquisitions also have played a major strategic role for firms such as Cisco over the years.  Keeping a strong cash position with low debt puts these firms in a position to move with speed and flexibility when an acquisition opportunity emerges.  

On the other hand, perhaps the weaker balance sheet at HP will play an important positive role in the short term.  The discipline of debt can restrain management from making flawed acquisitions or pursuing value-destroying diversification strategies.  Perhaps the balance sheet will constrain HP in a positive way, and keep new CEO Meg Whitman focused on shoring up the core businesses in the near term.

Apple's Pile of Cash

Apple reported earnings this week, and the balance sheets shows an enormous amount of cash:  $76 billion!   For the first time, we are beginning to hear more investors clamor for clarity about what will happen with this cash.  Some even would like to see some cash returned to shareholders.  In the Wall Street Journal today, we see a quote from one investor: "If they can't find ways to use it to grow, they should be returning it to shareholders," said Tim Ghriskey, chief investment officer of Solaris Asset Management, which owns Apple stock. 


On the other hand, some investors don't mind Apple's financial strategy at all: "It provides me enormous comfort that their balance sheet is so strong," said Mike Binger, a fund manager at Thrivent Asset Management, which owns Apple stocks. As far as he is concerned, "They have the flexibility to do whatever they want with it."

I am astounded by the amount of cash on the balance sheet.  Normally, I worry about firms that have this amount of cash.  I don't want them squandering the cash on flawed acquisitions or poor diversification strategies.  The question, though, is whether Apple deserves more of a benefit of the doubt, given their tremendous track record, coupled with the fact that they are still growing very rapidly.    To me, we should worry most about a cash pile like this when we have:

1. Slowing growth at the firm's core business
2. A history at the firm of flawed diversification or acquisition strategies.
3. Poor corporate governance practices at the firm
4. A lack of opportunities for productive R&D investments

To me, Apple does not raise concerns on these four points.   However, the situation bears watching as the pile of cash continues to grow at an incredible pace.