BALANCE SHEETS: In the midst of recession, cash is king in the US's high-technology industry - or so claimed Mr John Chambers, chairman and chief executive of Cisco, at the Comdex computer show in Las Vegas last November.

The head of the leading router group should feel pretty regal: his company had $7.3 billion (€8.2 billion) of cash on the balance sheet last quarter.

Mr Larry Ellison, his counterpart at Oracle, the world's second-largest software company, which has net cash of $6 billion, was equally convinced of the merits of such large sums on his balance sheet. "Cash? It's an unfair source of competitive advantage," he joked.

Their enthusiasm for strong balance sheets comes from customers' tendency to buy from large, cash-rich vendors who they are sure will survive to support their products. Smaller vendors, which could run out of money, are struggling to maintain credibility and sales.

But can technology groups have too much cash and, if they do, how should they return it to shareholders? The biggest tech firms continue to pile up cash and want to retain earnings for expansion.

But the sector's growth rates are declining and the potential returns on investment appear to be falling. There are real questions whether management can be trusted not to waste shareholders' capital.

Take Microsoft, which generates cash flow at the astonishing rate of $1 billion a month and at the end of the last quarter had $36 billion on its balance sheet.

"You really have to ask, once the antitrust case is over, what they need that much money for," says Mr Zhen-Hong Fan, technology strategist at Merrill Lynch.

Technology companies have always been loath to return money to shareholders, says Mr Fan. Just more than 50 per cent of US non-tech companies with market capitalisations of over $100 million pay dividends.

Yet, among technology groups of the same size, that figure falls to just 8.4 per cent, according to Merrill Lynch. Last week, Microsoft and Oracle said they had no plans to issue dividends.

Many technology companies insist the cash cushion is needed to fund possible strategic acquisitions or investments. Talking to the Financial Times last year, Mr John Connors, Microsoft's chief financial officer, defended the firm's ballooning purse and explained that the company would need cash to make significant investments.

The danger looms when investments destroy value, as managers build a bigger but not necessarily more profitable empire. Last quarter, Microsoft announced a $1.2 billion charge on investments, primarily in the cable and telecommunications sector.

The other rationale for keeping cash is to fund research and development.

"You have to keep sustaining the R&D budget," said Mr Craig Barrett, Intel's president and chief executive. "Our R&D budget has never fallen year on year," he said.

Intel may be the exception that proves the rule. Mr Michael Nevens, head of the global technology practice at strategic consultants McKinsey, argues the ability of tech firms to consistently generate a return above cost of capital from R&D is doubtful.

"On average, across the industry, the return on high-tech R&D is negative but a few companies compensate by generating extraordinary returns. The problem is that it is very difficult to do that consistently," Mr Nevens said.

If companies are in danger of investing in value-destroying deals, or in research and development that generates a return lower than cost of capital, that is a good reason for rationing cash, says Merrill's Mr Fan. "If funds are tight, it should impose discipline on executives," he says.

How then should cash be distributed? In theory, announcing the start of dividends should attract a more stable class of investor, which wants regular income.

However, dividends have the disadvantage for shareholders that surplus cash is taxed twice: once from the company's earnings and once when distributed as a dividend. There is also the problem that the market could interpret the start of dividends as a signal that high-tech groups are no longer growth stocks.

Mr Fan says the record is mixed among the three technology companies - Intel, Computer Associates and Compaq - that started paying dividends in the past decade. He points out that IBM has done well, even though it declares dividends.

The more attractive alternative is to distribute cash through stock repurchases.

"You can do three things with cash," says Mr Michael Dell, chairman and chief executive of personal computer firm Dell.

"You can buy stakes in other companies, you can reinvest in the existing business and you can buy back stock. Our default is buy-backs. We will not do stupid things with our cash."

Microsoft could learn a lesson here. In the financial year ending in June, it issued 189 million shares and spent about $6 billion repurchasing just 89 million shares. By the end of next year it could have as much as $48 billion on its balance sheet. The world's largest software company will have to do something, or it may have to rename itself Microbank.