Big tech has a big cash problem

Google is reportedly considering a bid for HubSpot. PHOTO: MARLENA SLOSS/BLOOMBERG NEWS
Google is reportedly considering a bid for HubSpot. PHOTO: MARLENA SLOSS/BLOOMBERG NEWS

Summary

Any acquisitions companies such as Apple, Amazon or Microsoft attempt will bring scrutiny and delays.

Having more money than you know what to do with used to be a high-quality problem. Now it is just a problem.

The largest tech companies in the world are also the richest. Apple, Amazon, Microsoft and the parent companies of Google and Facebook now collectively sit on a little more than $570 billion in cash, short-term and long-term investments. That is more than double the collective pile of the next five richest nonfinancial companies on the S&P 500 index, according to data from S&P Global Market Intelligence.

This is mostly attributable to business models that sell widely used products and services without the sky-high fixed costs common to other industries. Apple, Microsoft and Alphabet each produced more than $100 billion in cash from operations last year. Oil giant Exxon Mobil’s operating cash flow was a little past $55 billion for the same period.

 

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That is an awful lot of capital to have to put to work. And doing so effectively has become an even bigger challenge over the past couple of years, as regulators in the U.S. and around the world have zeroed in on Big Tech, with the determination to keep it from getting bigger. Amazon, Adobe and Intel have had to spike acquisition attempts over the past year because of resistance from global regulators. And the deals that do get through are taking longer and require costly lobbying efforts. Microsoft’s acquisition of Activision Blizzard took nearly two full years to close. Its next largest deal—the 2016 acquisition of LinkedIn—took a little under six months.

Still, piles of unused cash might be burning a hole in some pockets. Google is reportedly considering a bid for HubSpot, a provider of cloud-based software used for email marketing and other advertising-related functions. The price of such a deal would likely come to more than $40 billion—a 30% premium to HubSpot’s market value from before Reuters reported Google’s interest in the company on Thursday. That would be more than three times the size of the company’s largest deal to date—the $12.5 billion acquisition of Motorola Mobility in 2012.

Such a move seems foolhardy, particularly because it could be seen as Google further buttressing a $238-billion-a-year advertising empire that the U.S. government already feels is too dominant. But Google also has the most dry powder—even compared with the other superflush tech companies—with nearly $98 billion in cash net of debt on its books as of its latest quarter. That is double the net cash of archrival Meta Platforms and well above Apple’s net cash balance of $64.5 billion.

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Google might also be feeling more confident following Microsoft’s success in finally clearing its Activision purchase. Speaking at a Bloomberg Intelligence conference on Thursday night, Google general counsel Halimah DeLaine Prado declined to comment on questions about a HubSpot deal. But she said Google approaches both products and deals “with the notion that we need to be bold and responsible," according to a transcript from the event. Prado added: “That does not mean that road is always going to be easy."

Google’s pursuit of a $40 billion deal in the advertising space most definitely won’t be easy. Alphabet’s stock price lost nearly 3% Thursday following Reuters’ report, though it gained back some of that ground on Friday. “We question the rationale of this talked-about deal and whether this is the best use of capital," wrote Brent Thill of Jefferies in a note to clients Friday, citing both the high odds of “fierce antitrust pushback" and the fact that HubSpot’s software runs on Amazon Web Services—Google’s biggest competitor in cloud computing.

But there are also only so many ways to put such a large amount of cash to work. Google’s parent spent $61.5 billion on share buybacks last year and $59 billion the year before, according to FactSet. And even those are becoming controversial. In its antitrust lawsuit against Apple last month, the Justice Department noted the company’s $77 billion in share buybacks last year—more than double the nearly $30 billion it spent on R&D—as evidence that “Apple itself has less incentive to innovate because it has insulated itself from competition."

Apple also spends about $15 billion a year now on its dividends. But the iPhone maker has long eschewed major deals; its $3 billion buyout of Beats Electronics in 2014 remains its largest ever. At Apple’s annual meeting in 2010, co-founder and then-CEO Steve Jobs joked about blowing the company’s then-record $40 billion cash pile on a huge toga party. That might actually be among the least controversial uses of excess capital these days.

Write to Dan Gallagher at dan.gallagher@wsj.com

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