Cash-rich tech firms can afford to wait

The common theory about why investors dump unreasonable amounts of money into startups — further inflating the tech bubble — is that those investors think they’ll make big dollars from a blockbuster IPO.

But we have yet to see a rush of companies go public, even after they rack up skyhigh private valuations. And once the Federal Reserve raises interest rates this year, the stock market will inevitably cool down.

So where’s all that money going? Why do venture cap Non-financial italists continue to fund startups at unsustainable levels? Namely because they are counting on a big payday — not from Wall Street, but rather from corporations that are sitting on huge stockpiles of cash.

companies in the United States amassed a whopping $1.3 trillion in cash on their balance sheets at the end of 2014, up 4 percent from the previous year, according to a recent report by Moody’s Investors Service.

Four of the top five cash hoarders are tech firms — Apple, Microsoft, Google and Cisco.

Some speculate that these cash-rich tech giants and others will make lots of acquisitions.

“I sense that ... cash-rich

treasuries at Amazon, Apple, Cisco, eBay, EMC, Hewlett-Packard, Microsoft, Oracle, Salesforce will yield high valuation acquisitions of venturebacked startups,” wrote Igor Sill, founder and president of Geneva Venture Group, in response to a recent survey of venture capitalists conducted by the University of San Francisco.

It’s not hard to see why Sill is so bullish. In general, companies have been buying other companies in greater numbers of late. This year, mergers and acquisitions in the United States have totaled $1.1 trillion, more than 66 percent higher than the same point in 2014, according to Dealogic.

With $121 billion in such deals, the technology sector trailed only health care and energy as the most attractive industry.

But here are three reasons those cash-rich companies won’t go as crazy as they could:

The Great Recession still looms large in the collective memory: Since the turn of the century, the U.S. economy has experienced two recessions, including the most severe economic downturn since the Great Depression. You can understand why companies want to build a sizable rainy-day fund.

Tech companies in particular want a lot of cash to weather big disruptions in their markets caused by a quickening stream of innovation, said David Larcker, director of the Corporate Governance Research Initiative at Stanford Graduate School of Business. “You want to have some buffer in an industry that can literally change overnight,” Larcker said.

In any case, the money is not readily available, because companies tend park the cash overseas to avoid paying U.S. taxes.

Microsoft, Apple, Google and five other tech firms now account for more than a fifth of the $2.10 trillion in profits that U.S. companies are holding overseas, according to Bloomberg News.

Some companies have better uses for the cash: Shareholder activists like Carl Icahn and William Ackman have been pressuring companies to return cash directly to shareholders instead of funneling the money to research and development or acquisitions.

Starboard Value, a New York activist hedge fund, has been especially critical of Yahoo CEO Marissa Mayer’s acquisition strategy.

Since Mayer arrived at Yahoo in 2012, it has purchased more than 40 companies, including a $1.1 billion acquisition of blogging site Tumblr. But Yahoo’s stock price has barely moved.

Starboard has demanded that Mayer return Yahoo money, especially the $9 billion the Internet giant received from Alibaba’s recent IPO, to shareholders, rather than spend it on deals that don’t move the needle much.

Last year, the top three uses for corporate cash were capital spending ($937 billion), dividends ($394 billion), and stock repurchases ($289 billion), all record highs, according to Moody’s. Companies did spend $322 billion on mergers and acquisitions, a 20 percent increase from 2013, but effectively equal to 2012 and 2011 levels, the firm said. Companies can still drive a hard bargain: With venture capitalists funding a record number of startups at sky-high numbers, companies can afford to be thoughtful about what they choose to buy and at what price. Supply is far outstripping demand.

Apple may be sitting on more than $150 billion in cash, but the company adopts a disciplined (some might say pennypinching) approach to buying other companies.

In other words, just because a company is willing to do a deal doesn’t mean it will overpay for an acquisition.

Most experienced investors know this, said Mark Cannice, a professor of entrepreneurship and innovation at USF, who authors a survey that gauges the confidence levels of VCs.

But here’s the problem: a host of new players — especially corporate VCs and private equity firms — are now funding startups.

Do these “tourists” have the necessary acumen to properly value their investments, Cannice wonders.

If not, the tech bubble will only get fatter, because these newbie investors are funding startups and expecting a big corporate check — one that may never materialize.