Barron's on "Tech's Billions in Cash"
This weekend's Barron's features the article, "SVB Collapse Creates New Risk for Tech's Billions in Cash," which tells us, "As Silicon Valley Bank slid into receivership this month, one of the most unsettling disclosures was the large number of companies with bank deposits in excess of the $250,000 covered by federal deposit insurance. In the most startling example, the streaming video company Roku revealed that it had $487 million parked there, about 26% of its total corporate cash. 'At this time, the Company does not know to what extent the Company will be able to recover its cash on deposit at SVB,' Roku said in a securities filing. Those were scary words until the government came to the rescue of Roku and hundreds of other SVB depositors with accounts in excess of $250,000, vowing to make them whole. But the disclosures raise questions, not least of which is what other large companies are doing with all their cash." The piece continues, "It's no small market. According to Carfang Group, a treasury management consulting firm, U.S. companies currently hold about $3.6 trillion in cash on their balance sheets, soaring over the last two decades, from about $1 trillion in 2000. Just the five megacap tech companies alone -- Apple (AAPL), Microsoft (MSFT), Alphabet (GOOGL), Amazon.com (AMZN), and Meta Platforms (META) -- hold more than $500 billion worth of cash and marketable securities. The financial tech execs I spoke with, who asked not to be identified, noted that it's not unusual for larger companies to have hundreds or even thousands of bank accounts. Companies with geographically vast footprints and large daily cash deposits -- think of large retailers like Walmart or Costco Wholesale -- require a vast network of banks, often in places where larger banks don't have operations. Countries with far-flung international operations need local banks in every market, with multiple banks in China and other large countries." Barron's explains, "Here are some takeaways on how tech companies approach managing cash, according to senior execs I spoke with. The wisest course of action, they say, is to invest the cash in money-market funds backed by government securities -- or through direct purchases of short-term Treasuries, either through intermediaries or through the government's TreasuryDirect program. This generally cuts out the banks.... Several treasurers I spoke with said they use the money management portal from a company called Institutional Cash Distributors to access money-market funds from larger issuers like BlackRock, BNY Mellon, State Street, and others. They note that ICD provides a dashboard that makes it easy to invest in multiple money funds, spreading the risks, while getting detailed information on the combined nature of their holdings, in terms of duration, geography, credit ratings, returns, and issuers. They also noted that issuers pay a fee to ICD, but investors pay ICD nothing, with very low management fees on the funds." Finally, the story adds, "The primary goal for any corporate CFO or treasurer is capital preservation. A year ago, when rates were close to zero, there was no opportunity to generate a return on corporate cash. In the current environment, that cash can now generate a return that can be a useful addition to net income. But investors aren't buying tech stocks for their ability to squeeze extra dollars from cash balances, and there is little reason to take on additional risk to do it, despite the temptation to reach for yield. Tech companies may have piles of cash, but they aren't banks. They should be using their capital to innovate. Not speculate."
