Over the past year or so, I have been arguing that the substantial build up in the cash balances of many large United States corporations has been for the purpose of merger and acquisition activity. And, earlier this year, M&A activity seemed to be proceeding aggressively. (See my post “The Latest Merger Binge and the Economy,” http://seekingalpha.com/article/269056-the-latest-merger-binge-and-the-economy.)
Now, it seems as if these cash balances may be trending into more stock buy-backs than into the buying of other companies, at least in a relative sense. “US companies are buying back their own stock at the fastest pace since 2007…” (http://www.ft.com/intl/cms/s/0/381e8c26-9c14-11e0-bef9-00144feabdc0.html#axzz1Q0PX4bjp)
Today’s attention on stock buy-backs has been caused by the announcement made yesterday by electronics retailer Best Buy of a proposed $5 billion buyback program. (http://professional.wsj.com/article/SB10001424052702304070104576400062744226034.html?mod=ITP_moneyandinvesting_10&mg=reno-secaucus-wsj)
Analysts have been wondering what these large corporations were going to do with the huge cash balances on their balance sheets. These companies were producing profits, they were able to borrow at ridiculously low interest rates, and ample liquidity seemed to be available to them around the world. Also, there were a lot of other companies or divisions of companies “out there” that were really struggling and seemed to be possible “sitting ducks” for growth hungry large corporations.
Of course, one of the reasons for the build up of cash in some of these companies was the tax implications associated with bringing monies earned around the world back into the United States. But, this was not really the major reason. For example, Microsoft, a cash rich company, did not have to go out and borrow more than $10 billion in the United States, the first time Microsoft has even made use of the bond markets in its history.
Many economists were hoping that this build up of cash would result in a boom in corporate investment in physical capital, a stimulus to further economic spending and subsequent economic growth.
This physical investment has not yet surfaced.
My belief has been that this cash build up was for acquisition purposes. The companies that had the cash were strong and were “on the hunt” for their weaker brothers and sisters hoping to build their economic base by acquiring companies that were not in good positions, had too much debt, and were struggling to make ends meet. What a way to build markets and enlarge the company’s footprint!
This seemed to be happening…and I believe will continue to go forward.
However, the world economy seems to be stalling. Perhaps economic growth will not be as robust as originally thought…even three months ago. Thus, even though the merger binge may continue to some degree, the pickings may not be as lush as once thought.
And, the stock markets seem to have reached a near term peak. All the major indices, the Dow, the S&P 500, and the NASDAQ, peaked at the end of April. Many analysts are saying that with the stagnant economy and the high levels of under-employment, the chances are not very great that the stock market will show much resilience in an upward direction.
Thus, there is some drop off in the corporate enthusiasm for more and more acquisitions.
So, what does a company with a lot of cash on hand and with dwindling appetite for acquisitions do with all their loot? Managements with so much cash around and with very little hope that the economy will become more robust, just does not see these excess balances as a good use of resources.
The only viable alternative is to buy back their stock. They see this as the “best” investment available to them. And, so they buy back their stock.
Neither one of the latter two uses of the cash really do anything for the economy and the acquisition path could even result in worse economic results…at least in the short run.
Acquisitions, of course, can lead to plant closings, layoffs, and other efforts to combine firms, which increase productivity in the longer run, but does not contribute to capital investment or human employment in the short run. Obviously, these outcomes are not what the policymakers are looking for.
Stock buy-backs also do not stimulate capital investment or a reduction in unemployment in the short run and may not achieve either of these goals in the longer-run.
Therefore, if the economy is weak and more and more corporations seem to believe that the “best” investment of the cash they have accumulated is to buy back their own stock. it would seem that this is evidence that more and more corporations are not seeing a very bright economic future ahead of them. In my mind, this is not very good news.
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