Serious Money: While America's "old" economy labours in the face of low-cost foreign competition and the growing demands of pension plans, its "new" economy is extraordinarily liquid.

Technology companies carry very little debt, have little if any exposure to the pensions issue, while cash and marketable securities amount to almost 30 per cent of total assets. Firms such as Apple and Microsoft carry no debt, while liquid assets account for roughly 15 per cent of stock market capitalisation. Investors in the companies need to understand how excess cash affects value and what actions management should be pressured to take to make better use of their liquidity.

Some commentators have argued that excess cash has contributed to the drop in valuation multiples to the lowest levels in more than a decade. However, cash per se is value-neutral and typically has a negligible impact on the multiple investors are willing to pay for a dollar of earnings. Furthermore, surplus cash will place upward and not downward pressure on the multiple. Nevertheless, there are a number of situations in which it can and does destroy value, all of which apply to the technology sector.

Excess cash may arise as the number of value-creating investment opportunities declines. Microsoft for example, has increased revenues at a double-digit clip in all but one year since it went public 20 years ago. However, the long-term growth rate in sales has dropped from more than 40 per cent in the early 1990s to less than 12 per cent today. Simultaneously, its holdings of cash and marketable securities have grown from less than $1 billion in 1991 to more than $34 billion (€26.5 billion) today. It is no longer the high-growth company it once was, but a collection of businesses, some of which are high-growth, while others are mature.

The strong balance sheets that excess liquidity affords may reduce value because a firm may not be exploiting the valuable tax shields that debt provides.

Debt is cheaper than equity not only because the holder has a prior claim on the firm's cashflows, but also due to the fact that interest payments are tax deductible. When deciding upon an appropriate capital structure, management must compare debt's tax benefits with the costs that may arise should it encounter financial difficulties. Young companies typically have few borrowings, while mature firms with stable cashflows will normally have high debt levels.

Companies with little or no debt will not be subject to the normal discipline that financial markets impose as they have no need to raise new funds and may view capital as costless.

Consequently, maturing firms may be tempted to resort to acquistions in a futile attempt to boost growth.Most acquisitions fail to deliver and the technology sector has a very poor record in this regard, including IBM's purchase of Lotus, Compaq's acquisition of Digital and America Online's purchase of Netscape. Xerox, one of the great stocks of the 1960s, has the dubious honour of having made three failed acquisitions from the late-1960s to the mid-1980s.

It is clear that excess cash destroys value and consequently, investors should push technology companies to optimise their balance sheets through increased dividend payments and share repurchase programmes. Most technology companies have stock buyback programmes in place, but these do not go far enough as the cash continues to grow. Cash and marketable securities have more than doubled as a percentage of assets in the past 10 years to almost 30 per cent today. Apple, Dell, Microsoft and Motorola all have balance sheets that are extraordinarily inefficient.

Shareholders must demand greater capital efficiency from the technology sector. Investors should demand that dividends are increased to an appropriate level and that share repurchase programmes involve the use of debt. The addition of an appropriate amount of debt to balance sheets should give investors confidence that companies will not embark on a value-destructive spending spree and provide a significant boost to share prices. The top technology companies could easily release as much as $150 billion to shareholders without impairing their financial health.

Microsoft could return almost $50 billion immediately and consequently, it is a welcome development that it recently increased its repurchase programme to $40 billion.

Several companies will be reluctant to take corrective action, arguing that they require a large cash balance and conservative balance sheet in order to maintain financial flexibility. This argument is questionable as companies can generally raise capital to fund value-creating opportunities both quickly and cheaply. They may further argue that their cashflows are volatile and therefore their balance sheets cannot accommodate risky debt.

For emerging technology companies, this may well be true, but for mature firms it is dubious. Microsoft for example, generated free cashflows of almost $40 billion over the past five years and more than $14 billion in the last year on the capital invested in its core businesses. It is hard to argue that its balance sheet cannot accommodate debt.

In reality, technology companies are reluctant to return cash to shareholders because they believe investors expect them to have plenty of investment opportunities. However, the decline in growth rates is already reflected in valuations and the sector is appearing on the radar screens of corporate raiders and buyout funds. Carl Icahn, the legendary raider, recently bought a stake in Symantec, while seven buyout firms acquired SunGuard Data Systems last year.

Investors who are wary of technology stocks in the face of an economic slowdown should look no further than Microsoft. The recent $20 billion tender for shares, of which less than 20 per cent was completed, means that its share price is underpinned at $25. A new product cycle is at hand, while the close friendship between Bill Gates and legendary investor Warren Buffett may ultimately precipitate a much-needed balance sheet restructuring. Microsoft is a "must have" stock.