Thursday, February 10, 2011

The Worldwide Cash Buildup In Corporations

One of the most wildly optimistic articles I have seen on the economic recovery recently appeared yesterday in the Wall Street Journal: its title, “Corporate Cash Hoards Offer Hope.” ( This article begins

“Time to splash the cash? The corporate dash for liquidity that started in 2008 and accelerated in 2009 is starting to reverse. Spending on capital goods, advertising and software is rising. With consumers deleveraging and governments feeling the pinch, corporate spending is key to the recovery. And the conditions may favor acceleration.

There are certainly no capacity constraints on spending. Nonfinancial corporates globally have $4 trillion of cash, up 38% from 2007, according to Citigroup's corporate-finance advisory group. Even allowing for higher liquidity buffers in an uncertain world, some $2.4 trillion could theoretically be surplus to requirements. The profit recovery and rising revenues mean companies are throwing off free cash. Borrowing conditions look good, too: The bond markets are wide open, and banks are lending more freely.”

By-the-way, did you see that Microsoft, a company that has tons and tons of cash, issued more bonds on February 4, 2011. It raised another $2.25 billion (over $6.0 billion offered) which goes along with the $3.75 billion raised in May 2009 and the $4.75 billion was raised last fall. That is almost $11.0 billion!

Our author states that corporate spending is now going for “capital goods, advertising, and software.”


Microsoft has continually stated that the funds it raised could be used for “stock buybacks, building up working capital, or corporate acquisitions.”

People who have read my posts before know where I stand.

I believe that a large portion of this cash buildup is going to be spent on...”corporate acquisitions.”

And, the phenomenon is worldwide. The following chart accompanied the Wall Street Journal article. As we can see, the buildup in cash is not just a United States thing. And, the acquisition binge we have started on is global, not regional or national. A lot of acquisition have already taken place or are in the works. Many more are on the way. Acquisitions to take advantage of the rise in commodity prices. Acquisitions to get into new markets. Acquisitions to get into major nations. Acquisitions to build scale. And, so on.

This is a time of transition...worldwide. The emerging nations are becoming stronger relative to the developed nations. The middle east is facing major upheaval. We are transitioning from a manufacturing world based on the worker to an information world based on knowledge. Old thought patterns are changing. The way to run governments is changing. Literature is changing. Political commentary is changing. Religions are in turmoil. We communicate by twitter, chat, and text. Nothing is settled.

Information is spreading, as it always has, only the speed is accelerating and this is causing major adjustments in the way people live and do business and govern. And, it is changing the way businesses are structured and organized.

Can you imagine a non-American organization owning the New York Stock Exchange! Can you imagine a Chinese bank owning an American bank! Part of the re-structuring of the world is that the barriers are really breaking down and in a way that has never happened before. And, so on and so on.

When I discuss the subject of corporate cash I always get comments regarding the amount of corporate debt that is still outstanding with the argument that the corporate debt is just the other side of the balance sheet from the cash that is being accumulated. Therefore, the buildup is just a lot of noise.

I would argue that non-financial businesses, as well as financial businesses, are divided into those that are still overly leveraged and are not doing so well and those that are doing very well, thank you, yet are issuing debt that costs them very little, so as to build up cash treasure chests.

The question I ask those that are doing very well is, “why are you issuing debt if you are just going to buy back your stock or build up your working capital.” These companies are profitable and are generating sufficient cash to buy back their stock or build up their working capital. They don’t need to issue debt to do these things.

The companies that are not doing very well and are highly leveraged are another story. They are not generating sufficient cash flow to de-leverage or they cannot raise any cash to reduce their leverage.

The picture is simple. There are a large number of the latter firms that are not going to be able to re-structure their balance sheets in such a tepid economic recovery. These firms will eventually succumb to the need to seek buyers in order for the existing organization to have any chance in the future, even as a part of another company.

And, a lot of the cash rich companies or organizations are “off shore”…that is, these potential acquirers are not American companies; yet they are seeking to purchase American enterprises.

And, whether or not you like it, a lot of organizations are going to get a lot bigger and everything is going to become more global. The most direct way this is going to happen is through mergers and acquisitions. But, M&A will not add jobs nor will it result in faster economic growth immediately. In fact, they will do just the opposite.

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