Years ago, when Bill Gates was still CEO of Microsoft (Nasdaq: MSFT), he described a simple principle he used to manage the company’s balance sheet. “I came up with this incredibly conservative approach that I wanted to have enough money in the bank to pay a year’s worth of payroll even if we didn’t get any payments coming in,” he said. “I’ve been almost true to that the whole time.” Facebook (Nasdaq: FB) is taking this philosophy to a whole new level. The company raised US$6.4 billion of cash after going public. Regulatory filings detailing its pro forma balance sheet shows Facebook now has US$10.3 billion of total cash and cash equivalents….
Years ago, when Bill Gates was still CEO of Microsoft (Nasdaq: MSFT), he described a simple principle he used to manage the company’s balance sheet.
“I came up with this incredibly conservative approach that I wanted to have enough money in the bank to pay a year’s worth of payroll even if we didn’t get any payments coming in,” he said. “I’ve been almost true to that the whole time.”
Facebook (Nasdaq: FB) is taking this philosophy to a whole new level. The company raised US$6.4 billion of cash after going public. Regulatory filings detailing its pro forma balance sheet shows Facebook now has US$10.3 billion of total cash and cash equivalents.
How does that stack up against Gates’ principle?
Accounting varies between companies, so it’s hard to get an apples-to-apples comparison. But here goes: Facebook had total selling, general, and administrative expenses (SG&A) of US$835 million in the 12 months ended March 31. With US$10.3 billion of cash, that would pay its overhead expenses at headquarters for more than 12 years without a cent of revenue.
Bill Gates, you look like a gambling man!
Even compared with Apple (Nasdaq: AAPL) — known for its ludicrously large cash hoard — Facebook is still the new king of cash. And its cash in relative terms trounces other tech giants like Google (Nasdaq: GOOG), Cisco (Nasdaq: CSCO), and Microsoft:
Source: S&P Capital IQ.
Now, if we’re really talking about overhead costs here, it might be appropriate to add in part of cost of goods sold. For Facebook that includes the salaries of workers at operating segments like server farms. Including these expenses would drop the company’s how-many-years-can-you-last-without-revenue metric to something like eight years (it would also drop the figures for the other companies shown in the chart).
Either way, the numbers are huge. Facebook has more cash than it knows what to do with.
In fact, it virtually admits as much in its IPO prospectus. Here’s what the company says about its new cash hoard (emphasis added):
We intend to use the net proceeds to us from our initial public offering for working capital and other general corporate purposes; however, we do not currently have any specific uses of the net proceeds planned. We may use a portion of the net proceeds to us to satisfy a portion of the anticipated tax withholding and remittance obligations related to the initial settlement of our outstanding RSUs. Additionally, we may use a portion of the proceeds to us for acquisitions of complementary businesses, technologies, or other assets. However, we have no commitments to use the proceeds from this offering for any such acquisitions or investments at this time.
Facebook’s acquisition of Instagram shows that it’s hungry, willing, and able to make big purchases. Maybe that hunger will continue, and its cash will be used up quickly. Other analysts have spun out all kinds of ideas for what the company can do with its cash — from ramping up on mobile ads to hiring new talent.
But it looks likely that Facebook will be yet another tech company with a bank account the size of many small nations. With interest rates stuck below the rate of inflation, that’s nothing to be excited about. Nor is it necessary — we’re well past Gates’ principle of conservatism.
And Facebook’s cash hoard didn’t come about from years of accumulated earnings, as Apple’s has. Most of it came from its IPO, after investors fought tooth and nail for a chance to buy what is objectively one of the most expensive large-cap companies in the world.
Think of it that way and the size of Facebook’s cash hoard is simply a reflection of the hype and excitement over its future. The larger it is, the greater the hype is.
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A version of this article, written by Morgan Housel, originally appeared on fool.com