Apple and many of the largest U.S. tech companies will back off from U.S. acquisitions for one simple reason: The tax man.
Although a recent report by Moody's shows that the overall pile of U.S. corporate cash grew 3% to $1.24 trillion in 2011, deal makers giddy on the prospect that cash rich tech companies like Apple, Microsoft (MSFT), Cisco (CSCO), and Google (GOOG) will go on a U.S. shopping spree may be disappointed, says Richard Lane, senior vice president at Moody's.
"I don't believe that corporate CFO's feel that there is a hole burning in their pocket in terms of the cash levels that they have," Lane says. He expects M&A and share buyback spending to be flat in 2012, leveling off at roughly $400 billion, a third below pre-crisis peaks.A deeper dive into balance sheets of the biggest U.S. companies shows that 57% of overall record corporate cash sits overseas, signaling that the bulk of corporate funds may not return to U.S. markets quickly because those repatriated assets would face a significant tax charge. The technology sector - by far the largest cash generator in the U.S. with a third of the overall total -- generates a staggering 71% of its cash abroad, exacerbating a non-U.S. cash trend. Moody's notes that the figure is expected to grow to 80%. That Apple driven tech surge has also put the sector to an above 20% weighting in the S&P 500 Index in 2012. But while Apple's stock closes on $600 a share, some investors are betting on a dividend, not a deals flurry. Apple holds nearly 10% of overall corporate cash but contributes very marginally to overall M&A activity, cutting less than $5 billion in its history, according to Bloomberg data. A $5 billion Thursday acquisition by Cisco for Israeli T.V. software company NDS may not be the bullish sign for U.S. tech deals that investors may hope for. Instead, Cisco's acquisition may be a signal of increasing deals abroad, where foreign dollars don't have to be repatriated at high tax rates. Additionally, Cisco hadn't cut a $1 billion post-crisis acquisition prior to the deal, in spite of its $46 billion in cash. Other cash rich companies that use M&A with frequency are also shying from big deals. For instance, Intel (INTC) was the most active acquirer in the last 12 months, cutting 23 separate deals according to Bloomberg data. But the world's largest chip maker disappointed investors hoping it would cut a mega-deal like a NVIDIA (NVDA) takeout. Intel spent $26.3 million on average in its deals, putting its total at just $605 million. IT services giant IBM (IBM) has been equally focused on "tuck-in" acquisitions instead of mega-deals. "IBM is classic in the sense of doing small acquisitions that can be grown through its global sales platform," says Lane of Moody's. "What we've seen over a handful of years is more tuck in, niche acquisitions for companies that have significant cash balances." Where will all the cash go? Moody's analysis shows that investors in cash rich blue chips should expect a majority of their cash to go to capital expenditures. After hitting $714 billion in 2011, or 56% of overall cash, capital expenditure spending is expected to grow in 2012. Meanwhile, companies may continue to up dividend payouts after a crisis-driven fall in returns of capital. After a near 5% plummet in 2009, Moody's expects that dividend payments will grow up to 7% annually, after companies returned $284 billion in dividends in 2011, the second biggest net cash use. Related Links: 8 Stocks Rising Fast on Rich People's Spending
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The 10 Worst of the Worst in 2012
-- Written by Antoine Gara in New York.
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