Silicon Valley Is Awash in Cash -- Where Does It Belong?

The analysts at Piper Jaffray must've had too much time on their hands lately. While waiting for earnings season to swell up in full force, a cross-industrial team of Piper analysts saw some $240 billion of stockpiled cash among S&P 500 tech firms and came to the conclusion that Silicon Valley should go on a spending spree of epic proportions.

Crazy, sexy, or cool? You decide.
There are some humdinger ideas in Piper's report:

  • Cisco Systems (Nasdaq: CSCO  ) should consider snapping up network efficiency experts F5 Networks (Nasdaq: FFIV  ) and Riverbed Technology (Nasdaq: RVBD  ) , says Piper. Hey, that's not entirely crazy -- Cisco is no stranger to blockbuster-style deals in the mid-cap range.
  • How about merging rising telecom operator CenturyLink (NYSE: CTL  ) with a Sprint Nextel (NYSE: S  ) on the decline? Again, CenturyLink has been on a spending spree lately, so this could be something to think about.
  • Or what if Intel (Nasdaq: INTC  ) turned around after buying security specialist McAfee and grabbed digital video expert Netflix (Nasdaq: NFLX  ) ? That one's my favorite since it involves one of my holdings buying another -- for no sensible reason whatsoever.

OK, Piper does have an explanation for that last one -- Intel could steal a march on the competition by requiring that any new device that wanted to stream Netflix video would need Intel software or even hardware inside. Never you mind that Netflix openly states that it wants to be a part of every media gadget it can, which would invalidate at least half of that strategy.

The bigger issue
In a larger sense, I think the Piper team is looking at these buyout ideas from the wrong angle. "Technology is clearly overcapitalized to a point of inefficiency," they say, and with interest rates at record lows, this would be a more efficient use of surplus cash than just stuffing it in a megasized pillow.

But you know, that's like returning money to someone else's shareholders. Intel is committed to a very generous buyback and dividend program, which returned $8.7 billion directly to Intel owners over the last four quarters. The shareholder-friendly plan may not have guaranteed hefty stock returns, but then Intel doesn't control the market. And I'm convinced the stock is undervalued today, on the eve of another earnings report.

Would you call that an inefficient use of cash? I sure don't. And I'd much rather have Intel stuffing cash in my pocket -- directly or indirectly -- than gambling on a media play that's more likely to kill Netflix than to help Intel.

Cisco is following in Intel's size 15 footsteps by joining the dividend-paying tech club. I'd posit that it's a better idea than overspending on fringe technologies that might get written off anyway, as Cisco did with the Flip video camera property and might end up doing to Linksys and its consumer-friendly networking gear.

Oh, and CenturyLink actually doesn't fit Piper's thesis at all. The company has $270 million of cash on hand but is also saddled with more than $7 billion in long-term debt partly to finance that recent spending spree. There's no unused cash lying around in piles of gold coins here, only hard-working dollars with dirt under their fingernails. You could hold CenturyLink up as an example of doing what Piper is suggesting, but the company has essentially bought its way out of the discussion already.

What to do instead
I'll admit that it would be fun to cover another wave of outlandish acquisitions and that I'd love to have some of my smaller holdings picked up for a large premium. I just don't think it's in the tech industry's best interest right now, with or without low interest rates.

Buyouts still make sense, but only if the additions do something for the core business. Without that kind of opportunity, giants like Cisco and Intel are still better off boosting real shareholder returns. There's no shame in being a dividend dynamo for the ages.

Learn more about terrific dividends in today's market:

Fool contributor Anders Bylund owns shares of Netflix and has written puts on Intel, but he holds no other position in any company mentioned. Click here to see his holdings and a short bio. The Fool owns shares of and has created a bull call spread position on Cisco Systems. The Fool owns shares of and has bought calls on Intel. Motley Fool newsletter services have recommended buying shares of Netflix, Cisco Systems, Riverbed Technology, and Intel. Our services have also recommended buying puts in Netflix and creating a diagonal call position in Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. You can check out Anders' holdings and a concise bio, follow him on Twitter or Google+, or peruse our Foolish disclosure policy.


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