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US regulatory pressures to shape big tech's 2020 spending strategies

As 2020 kicks off, cash-rich technology companies face pressure to put their deep capital reserves to work, but heightened regulatory and political scrutiny could limit companies' options, analysts said.

Microsoft Corp., Alphabet Inc. and Apple Inc. each reported hundreds of billions of dollars in liquid assets in 2019, including cash and cash equivalents, short-term investments and other securities. While investors typically encourage companies with large liquid holdings to pursue mergers and acquisitions, analysts note the growing unrest on Capitol Hill toward big tech including antitrust investigations and calls to break up the companies will likely make major M&A activity unfeasible. Instead, they see cash being allocated toward other areas, including next-generation 5G mobility service, cloud computing and regulatory compliance.

"The prospect for very large deals I think is not there, especially in this environment," said Samantha McLemore, portfolio manager at Miller Value Partners, an investment management company.

McLemore instead urged tech companies to be much more aggressive this year in returning capital to shareholders through stock repurchases and dividends, saying this presents a "huge opportunity" to spend down their hefty cash piles.

Another option, according to Daniel Morgan, a senior portfolio manager at financial service firm Synovus, is for U.S. tech firms to use their cash to get ahead of looming regulatory penalties and also bolster their respective businesses. This is especially true for Facebook Inc., he said.

"Probably No. 1 [for Facebook in 2020] will be concerns about the regulatory front," Morgan said in an interview.

Facebook was already hit with a record-breaking $5 billion fine by the U.S. Federal Trade Commission in 2019 related to the company's user data practices. Moreover, the company is the subject of an open antitrust probe from the FTC, and the agency is also reportedly contemplating pursuing a preliminary injunction against Facebook over competition concerns related to its practices for integrating apps like WhatsApp Inc. and Instagram LLC.

Facebook, Morgan said, will likely put money aside for potential fines that may result from the ongoing investigations into the company.

As of the third quarter 2019, Facebook reported holding $52.27 billion in liquid assets.

Facebook is hardly the only U.S. tech giant expected to face regulatory pressure in the coming year. State regulators are engaged in antitrust investigations of both Alphabet's Google LLC and Facebook, while federal antitrust regulators at the U.S. Department of Justice and the Federal Trade Commission are also engaged in broader probes evaluating how large tech platforms may have harmed consumers. And ahead of the 2020 U.S. presidential election, candidates such as Sen. Elizabeth Warren of Massachusetts have advocated for breaking up Facebook, Inc. and Google.

With all of this regulatory scrutiny making further M&A unlikely in the near term, these companies must determine how to spend their cash most effectively in 2020.

Morgan predicted Microsoft and Alphabet will continue building out their cloud computing businesses to better compete with Amazon, which remains a leader in the cloud market.

Both Microsoft and Alphabet have plenty of dry powder to spend. Microsoft ended the September 2019 quarter with $136.61 billion in liquid assets, up from $133.83 billion in the June 2019 quarter. Alphabet followed with $121.18 billion.

Morgan expects Oracle Corp., which has largely avoided the regulatory spotlight compared to peers, to focus its efforts on dividends and share buybacks this year. Oracle Corp. ended the September quarter with $35.70 billion in liquid assets.

As for Apple, which ended the September quarter with $100.56 billion in liquid assets, the company is expected to jump into the next-generation 5G wireless arena by designing a "robust" platform to facilitate faster download speeds and other advancements promised by the new technology, said Timothy Lesko, partner and portfolio manager at Granite Investment Advisors, an investment advisory firm.

"Apple needs to provide a robust platform for software developers to develop really compelling 5G experiences on iPhone, iPad, TV, all those places," Lesko said in an interview. "That requires a lot of spending on the platform and probably the server and cloud space for those developers to host that 5G data."

Apple, which was noticeably missing from the 5G race last year, is expected to release a 5G iPhone at its hardware refresh event this fall.

Wedbush Securities analyst Daniel Ives said the regulatory backlash on big tech remains a "lingering worry" that will cause "near-term uncertainty" for Wall Street investors this year.

"Regulation on [big tech] will be the 'political football' kicked around in the Beltway with a number of paths this situation may take, especially heading into a presidential election year," he said.

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