eBay's ( EBAY) pile of cash has grown to stratospheric levels, leading some investors to wonder when the company might start sharing the wealth.

The online auction giant's cash position stood at $1.7 billion as of Dec. 31, an amount that dwarfs its typical needs for working cash or capital expenditures.

So far, the company has largely avoided sharing its horde with its investors: eBay has never paid a cash dividend and never engaged in any large-scale stock-buyback program. Instead, it's gone the opposite direction, continuing to accumulate millions of dollars each quarter through employees' stock options exercises. (When employees exercise and sell options, companies receive the cash raised from such sales up to the exercise price.)

All this leads some observers to wonder when enough cash is enough.

"You're buying into an operating company, not a bank account," said Charles Elson, a business professor at the University of Delaware who chairs the school's corporate governance center. "At some point investors will say, 'Buy back the stock. Give me a dividend.' "

eBay representatives did not return calls seeking comment. But in its annual report, eBay cast doubt on whether it would initiate a dividend anytime soon.

"We currently anticipate that we will continue to retain any future earnings to finance the growth of our business," the company said.

Investors shouldn't be satisfied with that answer, said Beth Young, a senior research associate at the Corporate Library, a corporate governance research firm, who argued that the lack of candor from eBay about plans for its cash stash is a concern.

"I think shareholders are entitled to understand, if value is not going be returned to them in the form of a dividend or a share buyback, what's in store," Young said.

To be sure, few eBay shareholders are currently shouting, "Show me the money." After jumping 90.5% last year, the company's shares are up another 8.5% in 2004 through Tuesday's close, even as the Nasdaq Composite turned negative year to date. eBay's shares have appreciated more than 1700% since their debut in September 1998.

"Clearly there has been no pressure on them to pay dividends at this point," said Bala Dharan, an accounting professor at Rice University's Jones School of Management.

Winds of Change

That may change if eBay's stock growth slows as its revenue and earnings growth tapers off.

The company's results did soar last year, but much of its year-over-year growth was due to the inclusion of revenue and earnings generated by PayPal. eBay's 2002 results largely excluded earnings from the payment processor, which it acquired in the fall of that year.

Outside of PayPal, the growth rates of both eBay's core U.S. auction business and its overseas operations are slowing. That fact may become more apparent to investors this year, when the company no longer has the one-time boost from PayPal.

The growth investors typically drawn to eBay's stock have looked askance at dividends and generally don't sweat sky-high valuations (eBay's shares currently trade about 69 times its projected 2004 earnings).

But should the company's stock stall -- or if investors merely become more defensive and concerned about valuations -- the pressure on eBay to pay a dividend or buy back some shares will increase, Dharan said. Dividends can attract another pool of investors, who can help stabilize a stock's price if and when growth investors start to bail out, he said.

The company certainly seems to have the financial wherewithal to pay dividends or buy back its shares:

  • Its $1.72 billion in cash and short-term investments at the end of 2003 was up 44% from the end of 2002 and a staggering 330% since the end of 1999.
  • The current amount far exceeds the company's working capital needs. At the end of last year, eBay's current liabilities stood at $647 million. While that was up 68% from the end of 2002, it represented just 38% of the company's cash horde.
  • eBay's stash also dwarfs its recent capital expenditures and acquisition costs. Over the last three years, the auction giant has spent about $561.47 million on property and equipment, including a corporate jet, a pricey upgrade of its computer systems and an expansion of its San Jose, Calif., headquarters. The company expects to spend about $250 million in 2004 on property and equipment, according to its annual report.
  • The company's cash has also ballooned despite the $387.5 million it spent over the last three years acquiring stakes in its Chinese and Korean auction subsidiaries, and in buying the outstanding shares of Billpoint, its former payment-processing service.
  • Last year, the company generated $743.48 million in cash from its operations, excluding a tax benefit it saw from issuing stock options. Over the last three years, the company's operations have generated about $1.3 billion in cash, excluding the tax benefit.
  • eBay's cash balance has also swelled because of its massive use of stock options. Employee option sales added about $831.5 million to eBay's cash balance last year and about $1.38 billion over the past three years, including a tax benefit from those exercises.
  • While options exercises bolstered eBay's cash position, they have also resulted in dilution of value for other shareholders. Since the end of 1998, eBay's outstanding shares have swelled 32%, or 156 million shares. Nearly half of that increase was due to options exercises, and shareholders may be in for far more dilution.

    At the end of 2003, company employees, executives and directors together held 22.5 million vested stock options, equivalent to about 3.5% of outstanding shares. Company insiders held another 46.7 million, or about 7.2% of outstanding shares, in unvested options. At eBay's current stock price, all of those were also in the money.

    eBay, of course, is not the only technology company that dilutes shareholders through its reliance on stock options. But other firms use share buybacks to help mitigate the impact.

    Yahoo! ( YHOO), for example, spent about $60 million in 2001 to buy back its shares and another $100 million on stock buybacks in 2002.

    In contrast, eBay spent about $356,000 over the last three years buying back stock. But even if the company wanted to reward shareholders with a buyback, buying its high-priced shares may not be the best investment right now.

    "I think they're in a very difficult position," said Albert Meyer, general partner of 2nd Opinion Research, an independent research firm. "Cash is not a very good asset to hold."

    To paraphrase an old saying: May we all be so burdened as cash-laden eBay.

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