For years, I have watched the number of technology companies that operate without debt. The trend has always been popular among IT/IS companies because of the fundamental instability of intellectual property over hard assets. The logic is hard to argue with. If everything you “own” of value only has value as a direct cause of its perceived importance, then a shift of public perception doesn’t just hurt your brand, but fundamentally devalues your property.
Think of it this way; if tomorrow everyone stopped trusting Google for their search results (say, you know, someone found out their code sent all our personal information to the Chinese) then overnight they could loose 95% of their US market share. How much is Google’s code-base worth at that point? Currently Google is trading at 183 billion so a 95% loss in usage would probably translate to a market value somewhere south of 3-5 billion.
Physical assets don’t behave the same way. 1,000,000 lbs of steal doesn’t just loose 98% of its value overnight. Even in heavily over-inflated markets things like… I don’t know… homes, don’t loose 98% of their value. People may be upset that their 350,000 home is now worth 260,000 but just image if one NIGHT your $350,000 home was worth $7,000. THAT is the danger for companies whose primary assets are intellectual property.
I will give you another concrete example. Once upon a time there was a company who made A LOT of money in the energy trading business. Basically the company had sold off almost ALL its physical assets because they made so much money acting as a broker for energy trading. Think of them as the stock market (or eBay) for energy. The only problem was that their principal value lay in the fact that people trusted them, trusted their market, trusted their systems, and trusted their software. Then one day it was demonstrated that this company lied, cheated, and stole in almost every way you could imagine. Enron’s stock dropped from $90 to just under $1 in a matter of weeks. Basically, Enron’s major asset was trust, which it lost, and the company disintegrated overnight.
So how does a company protect itself from such quick devaluation? The same way you and I protect ourselves from economic turbulence; a big savings account and as little debt as possible. Microsoft, for example, is famous for “saving” close to a billion dollars a month… yes, a MONTH! At the same time, Microsoft doesn’t borrow money. I have been told, by people I put NO trust in to know this information, that they don’t even lease the copiers. Competitors who want to beat Microsoft can certainly do so, but it will not be an easy fight. That kind of financial position means that competitors must beat them dollar for dollar, customer for customer, year in and year out… for YEARS!
So who else do you know that doesn’t use debt? Here are are couple names both in IT and outside of it. Accenture, Activision Blizzard, Apple, Bed Bath & Beyond, Broadcom , Citrix Systems, eBay, Gap, Google, Infosys Technologies, Juniper Networks, Marvel Technology Group, Qualcomm, Research In Motion, Stryker, Texas Instruments, and Yahoo. Want to see something more amazing? Check out those companies 1, 3, and 5 year average returns compared to the market average!
I think it was Warren Buffett who said, “Leverage [i.e. debt] is a funny thing, people who don’t understand it shouldn’t use it; and those who do, don’t.”
