Time to Get Off Your Cash?

Companies are content to sit on their cash hoards, but investors are losing patience. What's a CFO to do?

Akamai acquired six companies in the past five years, spending more than $100 million in cash on its last two deals. “We made the first three [deals] in late 2006 and early 2007, when our cash balance was lower and our stock was in the 50s, so using equity made more sense,” says CFO J.D. Sherman.

Akamai’s transactions are “tuck-ins that grow our wallet share in our existing customer base and create new opportunities for customers in verticals like financial services and health care,” says Sherman, and he plans more. That’s what fund managers in the BCG survey claim to want: deals that build a moat around the core business or leverage it, not ones that are adjacencies or transformational. If companies wait too long to pull the trigger on deals, however, investors can get antsy, worried the funds will burn a hole in management’s pockets.

But Akamai isn’t rushing to buy. CFOs shouldn’t set absolute deadlines to get deals done, advises Sherman. “If you give your corporate-development guys a hammer, everything looks like a nail,” he says. “The flip side is, we don’t want this kind of cash on the balance sheet earning 1% to 1.5% for shareholders.”

Meanwhile, enterprise-software firm Informatica has been busy on the M&A front since last year, plunking down $470 million in cash in five deals since 2005. The company’s cash and short-term investments fell to $355 million in the first quarter, but that still represented 71% of sales. “We’re reinvesting in the business for the long term; these are technologies we can build around for the next 5 to 10 years,” says CFO Earl Fry.

A Carrot for Investors

While the likes of Akamai and Informatica concentrate on M&A, some sectors of high tech are maturing and growing more slowly, so boards are buzzing about possibly paying dividends to attract value-type investors, says Olsen. The Duke University/CFO Magazine Global Business Outlook Survey for the second quarter of 2010 showed that CFOs across all industries expect to grow dividends 2.8% over the next 12 months, down slightly from the previous quarter.

Furthermore, BCG’s survey showed that 32% of investors would prefer that companies make dividends the highest or second-highest option for excess cash, compared with 22% preferring stock buybacks. Investors are souring on share repurchases, because they see companies executing them poorly. But will dividends become more common, even at companies in early-stage markets?

The Female Health Co., manufacturer of a women’s condom for disease prevention, went public just a year ago, but it adopted a quarterly dividend policy in January. The company shelled out 27% of its $5.2 million March 31, 2010, cash balance in payment of its second dividend. “We really have more cash than we need,” says finance chief Donna Felch. Because Female Health sells primarily to public-sector buyers like government ministries of health, it has few marketing expenses and little need for more sales overhead as its unit sales increase. The company is also very cash efficient, manufacturing only against orders and collecting its accounts receivables promptly.

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