Cash is king … sometimes
Last week, I criticized growth company Skyworks for spending $200 million to buy back its own stock. Skyworks does spend much of its cash on research and development, but in a cutthroat industry that is expected to grow more than 42% in the next two years, there's always room for more R&D.
Many commentators and experts would have you believe that cash-flush corporate balance sheets are stronger than they've been in years. However, many companies have found little to do with all that cash; growth opportunities have stagnated as the economy sputters. This excess cash on corporate balance sheets is essentially just burning a hole in their pockets.
Intel: better than ever?
Just about a month ago, Intel trumpeted what it called its "best quarter ever." Company executives couldn't heap enough praise on themselves for growing year-over-year revenue by 34% in such a tough economic environment.
However, after a one-day pop following the initial news release, the stock has traded lower, revealing investors' flagging enthusiasm about future growth. Perhaps they were aware that Intel was about to purchase a software security company that occupies a totally separate sphere from Intel's core chip business, and at a share price that the McAfee hasn't approached since the tech bubble in 1999.
While the acquisition will pose some problems for Intel, it will also create important benefits and synergies. Intel had about $18 billion in cash and short-term investments on its balance sheet. It's now purchasing a company with relatively large gross margin of around 80%, compared to Intel's 65% in the recent quarter -- a figure some believe might represent a peak for the chipmaker. And with many analysts believing that chipmaking and security will become increasingly entwined in the years ahead, Intel would likely have to enter this business somehow. Unfortunately, the route it chose was on the expensive side.
Like fellow information technology giant Microsoft
As a result, the company has sought growth in other areas as well. Companies such as Cisco
The deal would also be more favorable if Intel were acquiring a company firing on all cylinders. Instead, it paid a 60% premium from Wednesday's closing price for a stock trading at fifty-two week lows. McAfee was having trouble with its own recent acquisitions, made in an effort to keep up with its largest security software competitor, Symantec
I wasn't surprised to see McAfee get gobbled up by a larger technology giant; I simply expected Microsoft, IBM, or Oracle
Andrew Bond owns no shares in the companies listed. Try any of our Foolish newsletter services free for 30 days. The Fool has a disclosure policy. Intel and Microsoft are Motley Fool Inside Value recommendations. The Fool owns shares of and has written puts on Intel. Motley Fool Options has recommended buying calls on Intel. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Oracle. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.