The Cash Funnel for Startup Exits
One of the obvious consequences of the current low interest rate and bond yield environment is how it impacts the cost of capital for companies. As a result, large tech companies are aggressively growing their cash reserves.
Billions in Bonds
Apple closed its most recent quarter with US$178 billion in cash. Yet the company just raised US$1.35 billion of debt at a cost of 0.28% to 0.74% per year. Not to be outdone, Microsoft just issued the largest bond offering in its history as a company, raising a total of US$10.75 billion to add to its existing cash position of US$90 billion.
A Global Trend
US companies are not the only ones getting aggressive. Tencent recently raised US$2 billion in bonds and Alibaba issued US$8 billion of bonds at the end of 2014. Of course, the Alibaba bond issuance came soon after the company’s record US$25 billion IPO, so companies are also raising equity in public markets.
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.
The Bottom Line
Regardless of what happens to financial markets, one constant over the coming months and years is that this funnel of cash will be used by the tech giants for even more aggressive investment and M&A activity, which is good news for both entrepreneurs and investors in terms of future startup exits.