Wednesday, February 11, 2009

"Firm's Cash Holdings and the Cross-Section of Equity Returns" (CSCO)

In the short term you'd rather own the acquiree. In the long term the acquiror can work out just fine.*
First up, CXO Advisory:
...Dino Palazzo measures and interprets the significance of relative cash holdings for future stock returns. Using stock return and firm fundamentals data spanning July 1967 through June 2007, he concludes that:
  • A hedge strategy that is long (short) stocks of firms with high (low) cash–to–assets ratios generates an average monthly return of 0.42%, before trading frictions. In other words, relative cash holdings may carry a positive premium for investors.
  • The three Fama-French factors (market, size and book-to-market) do not explain this difference in average returns.
  • Firms that are sensitive to economic shocks tend to use cash holdings as a hedge against future cash flow shortfall, and this conservative management approach pays off.
The following chart, taken from the paper, plots the risk-adjusted returns of 75 portfolios sorted on size, book–to–market and relative cash holdings (cash-to-assets ratio)....MORE
Next, from Tech Trader Daily:

Cisco’s Shopping List: EMC? VMware? Sun? NetApp?

While we’re all waiting for the economy to recovery, let’s play a round of the hot new game, “Who Wants Cisco To Make Them A Millionaire?”

That’s been a popular game this week, actually. Kicking off the action, Cisco (CSCO) on Monday raised $4 billion, selling $2 billion of notes due 2019 paying 4.95%, and another $2 billion of notes due 2039 with a 5.9% annual rate. But it’s not like they needed the money: Cisco closed the January quarter with $29.6 billion in cash and investments.

Cisco said it will use proceeds from the debt offerings “for general corporate purposes,” and to repay $500 million in notes due this year.

But the Street is figuring - well, hoping, anyway - that Cisco CEO John Chambers is plotting his next big acquisition. Cisco has always been a fairly acquisitive company, and it is not afraid of doing large deals. But it hasn’t done a large one since the 2006 acquisition of Scientific Atlanta for $6.9 billion....MORE

See also:
Cash is King: The 10 richest tech companies (Off-topic)

*Here's an online version of Ida M. Tarbell's "The History of the Standard Oil Company",
#5 on NYU's J-school list of the 100 best works of 20th-century American journalism. (via the NYT)