China Mobile has a $47-billion dilemma: what to do with its cash pile. The company already has more cash on hand than famously flush US tech firm Apple, and it is adding $8 billion a year at the current rate. Suitable foreign acquisitions targets are scarce, and buying back shares may be tough given the company’s majority state ownership. The best thing might be to invest in growth at home.
One option might be a big acquisition, but China Mobile faces a lack of juicy targets, and of experience. Beyond a small acquisition in Pakistan, the company has rarely stepped outside China. Operators in Europe now look cheap, but unionised workforces can appear a deterrent. Moreover, political scrutiny would dog China Mobile. Chinese telecom equipment maker Huawei’s bid for a US server technology company was blocked in 2008 over political suspicion. China Mobile’s own bid to buy a stake in a Taiwanese telecom services provider was blocked by Taipei.
An option is financial engineering, such as a share buyback. There, the state’s majority shareholding is a problem. State-owned companies generally hoard cash, rather than giving it to minority shareholders, and if the state didn’t choose to participate in a buyback, its 75 per cent stake would increase even more. A compromise would be to increase the dividend payout ratio, from the current 43 per cent of earnings to the Asian industry average of 60 per cent. That leaves investment. There’s room for China Mobile to spend more on its own growth. The company is valued at just 10 times expected 2011 earnings as revenue growth has slowed to below 10 per cent. Internet firms are piling on pressure with free services like voice and text.
China Mobile probably can’t compete on innovation, though it has been building its own applications. But it could always buy good Internet ideas. Its cash pile would easily swallow China’s biggest Internet firm by market capitalisation, Tencent. At the least, it could take stakes in Internet firms, which look cheap after recent corrections, to encourage closer co-operation. Otherwise China Mobile’s profits, and its cash-pile, may not be around for the long term.
