Software Safari - Premium Blog on Application Software

VCs and Green

                  The Greening of Silicon Valley

Don't know if you caught the 7/17/2006 cover story on Newsweek. It was about the Greening of America and described a number of initiatives people and businesses are undertaking to affect positive change in the world we live in.

I was particularly pleased to see Ray Lane (former COO of Oracle, former Booz Allen Hamilton partner and personal friend) quoted in this piece. He said:

'"Al Gore can't convince me, but his data can convince me," venture capitalist Ray Lane remarks ruefully. Lane is general partner in the prominent Silicon Valley firm Kleiner Perkins Caufield & Byers, which has pledged to invest $100 million in green technology. He arrived at his position as a "Republican environmentalist" while pondering three trends: global warming, American dependence on foreign oil and the hypermodernization of Asian societies.'

I'm witnessing these trends in some capital deals I'm involved in. Specifically, one of them is now struggling because:

- China and other developing nations are gobbling up every scrap of raw material this industry uses

- increasing fuel costs are driving processing costs through the roof

- environmental laws in the U.S. are making production here less attractive compared to more lax countries

Smart firms are using technology to reduce emissions, to capture and convert solar energy into a business and household asset, etc. When flying over Iowa the other day, I saw another wind energy farm. We need facilities like these along with investors willing to rewrite the ways we design and operate businesses.

Green isn't an issue that only affects one political party. It affects businesses, retirement plans, the global environment and so much more. We need VCs to fund experiments in green technologies (e.g., the electric auto initiatives that Kleiner and others are undertaking) and we need software to optimize the quality of the world we learn it.

Cash In Tech Firms

                             Too Much Cash in Hand

Story:

The previous post looked at debt financing and how it can provide the cash needed to fund acquisitions. This post looks at the amount of cash many technology firms have on hand and asks whether this is appropriate or not. For reference, please look at the BusinessWeek article "Corporate Cash: Use It or Lose It" in the 4/10/2006 issue.

Analysis:

I've been fascinated at the cash generation capabilities of Microsoft for years. Their cash on hand was as high as $60+ billion in 2004 (it was at 37 billion last year). In the BusinessWeek article mentioned above, the author examined the cash on hand as a percent of market capitalization (i.e., share price times the number of outstanding shares). The percentages ranged from 57% for Novell to 19% for BMC Software. In between these two firms were:

- Comverse Technology 49%

- Solectron 43%

- Compuware 28%

- Motorola  27%

and many, many more.

Many tech companies print cash. What to do with that excess cash is another matter though. Traditionally, technology firms use free cash flow to fund new development for new applications, to acquire competitors, to acquire complementary products, etc. But, how much is really enough?

When non-technology firms possess too much cash, it attracts a host of third parties. Greenmailers, leveraged buyout firms and others often pursue these companies. They take over the firm, return a fair amount of that cash to shareholders and sell off portions of the company. They know that the parts of company are sometimes worth more than the firm itself.

Shareholder activists are another group who'll be watching these cash balances, too. Of course, if your cash resaerves are greater than your firm's market capitalization, it's time to close down shop and find a better use for your money.

Comments?

The Use of Debt

                       Tech Vendors Using Debt Financing

Story:

A piece in BusinessWeek on 3/20/2006 titled "Debt Valley Days" is certainly an interesting read (www.businessweek.com). The article describes how large tech firms (like Cisco and Oracle) are utilizing corporate debt in lieu of self-financing.

Analysis:

The use of debt by large tech companies shows a degree of maturity in the industry. More importantly, when one understands why the debt is being used, you see how debt can help drive further consolidation within the industry.

The Siebel acquisition by Oracle is being financed partly by debt, partly by Siebel's existing cash balances and partly by Siebel's customer maintenance revenue.

The time to raise cheap, inexpensive, plentiful debt capital could be tightening up in the near-term. Interest rates continue to creep up and the U.S. dollar's continuing weakness against the Yuan and Euro make debt costs higher within the U.S. Rising oil and metals prices (to name but a few categories) will put inflation pressure on the U.S. economy. This in turn could raise interest rates.

The only factor that will work to the contrary is the extraordinary amount  of U.S. dollars held by persons, governments and central banks outside of the U.S. The trade balance deficit that the U.S. has is so great and with so many dollars floating around the globe looking for a place to be invested, U.S. capital markets should still find many buyers for debt offerings.

Debt is still an inappropriate or inaccessible tool for many mid-size and smaller tech firms. When it is available, it may come with onerous strings (e.g., clawbacks, vulture clauses, etc.). Like it or not, tech companies are volatile businesses and debt holders have usually shunned such deals.

If your tech firm wants debt and can acquire it painlessly and cheaply, do it now. Do it while you can.

Comments?

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