How Much Startup Candy Can US$2.1 Trillion Buy?

There’s more than US$2.1 trillion in offshore cash held by US companies looking to buy startups.

A Bloomberg report analyzed the details and concluded tech companies are leading the way:

“Microsoft Corp., Apple Inc., Google Inc. and five other tech firms now account for more than a fifth of the $2.10 trillion in profits that U.S. companies are holding overseas, according to a Bloomberg News review of the securities filings of 304 corporations.”

Earlier in 2015, I wrote about a cash funnel starting with low interest rates and ending with more tech M&A. Here’s the section that discusses why:

“Why are these tech giants expanding their already gigantic cash reserves?

1. Low cost of capital. This is the most obvious reasons. If you could raise US$1.35 billion at a cost of less than 1% per year, you would certainly not hesitate.

2. Balance sheet envy. US$90 billion seems like a very comfortable cash balance at first glance, but it feels a lot less comfortable when compared to your key competitor having US$178 billion.

3. Competition via acquisition. The outlet for competition among these companies is startup investment and M&A. Microsoft buying Minecraft for US$2.5 billion, Alibaba acquiring UCWeb for at least US$1.9 billion, Apple buying Beats for US$3 billion, and the list goes on.”

This week, we saw another example with Activision Blizzard announcing a US$5.9 billion acquisition of King, the company behind the hit game Candy Crush. Not surprisingly, there were some questions around the valuation, summarized best by this tweet from Sean Rose:

But there’s a twist.

Activision is a US company and is using offshore cash to buy a non-US company. This point was made by Shakil Khan in a tweet that was the catalyst for this post:

Looking deeper into the numbers, another Bloomberg report concluded that Activision was able to save US$1 billion in taxes by using offshore cash. That’s a big number for any company.

The natural follow up question is:

How many startups can the US$2.1 trillion in cash held by US companies offshore actually buy?

If the average acquisition is US$5.9 billion, then that would be 356 companies.

But we know that most startup acquisitions are smaller. What if the average was US$300 million? That would be 7,000 non-US companies that could be purchased with just the cash sitting offshore on the balance sheet of US companies.

It’s true that there are a lot of startups right now. But it’s also true that trillions of dollars have a crush on this startup candy.

Tytus Michalski

Tytus Michalski is a Managing Partner of Fresco Capital and is involved in all aspects of investment and operations globally.