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Tech companies are sitting on piles of cash that would make Scrooge McDuck from DuckTales envious. But they aren’t putting it to work to hire workers, buy equipment, or pay shareholders. Isn’t it their responsibility to do something with the cash?
One explanation is that companies like Microsoft (Nasdaq: MSFT ) , Apple (Nasdaq: AAPL ) , and Cisco (Nasdaq: CSCO ) are holding most of their cash overseas. At the end of the first quarter, these companies had $42 billion, $40.2 billion, and $38.8 billion in foreign cash on hand respectively. Bringing that home would create a big tax hit.
But there’s another factor that will keep these companies from paying investors back, at least in the form of dividends, anytime soon: stock options.
The real way to get rich
Stock options have been the compensation lottery ticket for decades in Silicon Valley and across public companies. Sign on with a start-up or newly public tech company and you may not take home a multimillion-dollar paycheck, but you may strike it rich with stock options. Since paying a regular dividend cuts the stock price and essentially lowers the value of the options, why would options-owning managers choose to pay a dividend and take a pay cut?
One of the companies hoarding cash is investor favorite Apple, which has $76.2 billion in cash and securities and isn’t paying a dividend. But employees are making a killing on stock options.
According to Apple's latest quarterly filing, since the last fiscal year ended on Sept. 25, 2010, Apple employees have exercised 7.8 million stock options at an average price of $63.20. With shares having moved between $300 and $400 for most of that time, if you assume an average sale price of $340 per share after exercise, that would equate to $2.2 billion in extra compensation. To put that in perspective, Apple only spent $1.8 billion on research and development over the same nine-month period. And there were almost 13.8 million more stock options outstanding as of June 25.
Google (Nasdaq: GOOG ) is another company that has rewarded employees with stock options. Google has nearly 11 million options outstanding with a weighted average exercise price of $347.36. That amounts to around $1.9 billion in extra compensation for employees at today’s stock price.
The art of the special dividend
One thing these companies could do is pay out a special dividend. When Microsoft began paying a dividend, it reduced its cash load by declaring a one-time special dividend of $3 per share. These are treated differently than regular dividends for stock options and actually adjust the price of the option. If I had an option that exercised at $20 and a special dividend of $3 is paid, now the option is exercisable at $17. It doesn’t affect employee’s option value the way a regular dividend does.
Self-interest plays a role
Stock options can help align employees’ best interests with investors, but don’t think those options don’t affect decision making. Options are a huge part of compensation, especially when a stock is rising, so there’s some self-interest on management’s part. And anyone’s decisions would be affected if billions of dollars were on the line.
You can hope that Apple, Google, or any other tech company will pay a dividend with their large cash hoard, but I’m not holding my breath.
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