Why Are Large Corporations Holding Back?

Where have the buybacks and competitive acquisitions gone?

(Note: I own shares in Google, Apple, Microsoft, and Amazon. This article serves educational purposes and does not constitute investment advice.)

One key reason I remain optimistic about large-cap tech firms is their substantial cash reserves. Companies like Google, Microsoft, and Apple each possess over $100 billion in cash and liquid investments (mainly in bonds), while Amazon is close to the $100 billion mark. Collectively, these companies generate tens of billions in annual cash flow, with Google, Microsoft, and Apple nearing $100 billion.

This accumulation of capital acts as a strategic reserve, intended for deployment during challenging times when competitors may be faltering. There are two actions I would like to see from these cash-rich giants in the near future.

First, share buybacks. Firms often engage in buybacks when their stock prices are inflated but tend to hesitate when prices drop significantly. This approach should be reversed—during prosperous periods, companies should reserve cash for future downturns. In contrast, when facing economic hardship, they should utilize those reserves to buy back shares at reduced prices (a strategy Warren Buffett excels at). This benefits long-term shareholders, as share repurchases enhance each investor's ownership percentage and share of profits. However, this strategy only proves effective when shares are repurchased at favorable prices. Committing large sums to buy back shares when the price-to-earnings (P/E) ratio is excessively high equates to financial waste (e.g., paying $2 for something worth $1). Unfortunately, during economic downturns, even cash-rich firms exhibit risk aversion. It is my hope that large-cap tech companies can recognize that these challenging circumstances present opportunities rather than threats.

Second, strategic acquisitions of struggling competitors in promising sectors. The challenge, of course, lies in navigating regulatory approval for such deals. For instance, Disney's market cap has plummeted from $350 billion to just $158 billion—a figure roughly equivalent to 18 months of Apple’s operating cash flow. Acquiring Disney would position Apple as the leading player in entertainment and streaming, provided regulators permit the acquisition. Major mergers often occur during market highs, as seen with Elon Musk's $44 billion purchase of Twitter. However, during economic downturns, assets may be acquired at lower valuations, and employees driving the value of these assets are more likely to remain post-acquisition due to industry-wide layoffs. Unfortunately, business development teams that were eager to pursue deals during market highs often retreat during downturns.

It's disheartening, as I invested in these corporations with the belief that their considerable cash reserves could be effectively utilized during turbulent times. I hope to be pleasantly surprised in 2023.

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The first video, Megacorporations Make Poor Governments, discusses the challenges and implications of mega corporations' governance. This exploration highlights how their cautious behavior impacts market dynamics.

The second video, 8-13-24 Four Reasons Mega-Caps Are Not Dead Yet, outlines key factors contributing to the resilience of mega-cap companies, emphasizing their potential in a fluctuating market.