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.” (http://professional.wsj.com/article/SB10001424052748704858404576133800157070140.html?mod=ITP_moneyandinvesting_8&mg=reno-wsj) 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.”

Really...

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.

How the Crisis Catapulted Us Into the Future

“How the Crisis Catapulted Us Into the Future,” is the title of Martin Wolf’s opinion piece in the Financial Times this morning. Wolf, in the article, ruminates on what he experienced last week at the World Economic Forum held at Davos and how this all fits into the world we are now living in.

Wolf concludes: “The crisis has not proved a great turning point, so far. But we cannot conclude that it is of small significance. It has brought some transformation, much acceleration of previous trends and, above all, great uncertainty. That uncertainty was present all along. But now we know.” (http://www.ft.com/cms/s/0/5fc7e840-2e45-11e0-8733-00144feabdc0.html#axzz1Chh2pOYC)

The usual items are mentioned. First, the “turnarounds” such as the tightening of financial regulation, the de-leveraging that still continues, the lessening of “global’ imbalances”, and the vulnerability of the Eurozone’s “excessive accumulations of private and public sector leverage.” Then there are the “accelerations” such as the new focus on sovereign fiscal affairs, the “accelerated shift in the global balance of economic power,” the changes in relative attitudes in the west and in the east, and the uncertainties related to how the future is going to work out.

There is another change that has taken place over the past three and one-half years that Wolf doesn’t allude to but is one that has also accelerated during the crisis and will play an even more important role in the future. A consequence of the financial crisis has been the rapid advancement in the use of information technology in the world and the effect this advancement has had in changing the way we all do business and how we govern and how we all live.

First, the headlines in newspapers all over the world tell us of the events taking place in Tunisia and Egypt, and in Jordan and Syria, and elsewhere. Could these events, would these events have taken place if information had not spread about conditions in different parts of the world and if communications had not been as complete as they are. In Egypt the Internet was closed down, but that didn’t stop information from traveling.

Analysts have argued that two factors seemed to be catalysts for the uprisings that have taken place: food prices and unemployment. In terms of the former, information spread that food prices were an international concern and impacting countries with autocratic governments the worst. Unrest was experienced in other countries as more and more people reacted to governments that were a part of the problem and not a part of the solution.

In addition, people had more and more information that countries other than the developed countries were experiencing economic expansion. China and India and Brazil, among others were creating a future and putting people, educated people, to work. This was not happening in Tunisia or Egypt, Jordan or Syria or in some of the other countries experiencing unrest.

Information and the spread of information is something governments are going to have to take more and more into consideration in the future. But, this does not just extend to social issues.

Governments are finding it harder and harder to hide things. One of the fallouts of the crisis in the Eurozone is that governments like Greece were hiding things so that its financial condition was not really apparent to its people and to people in the investment community. Spain is now experiencing some of this within its regional governments. This is causing Spain real headaches in attempting to stem the impending financial crisis it faces.

But, people in the United States cannot be too smug in this area. More and more we are finding out how state and local governments “hide things” in managing their finances especially in the accounting for pension fund liabilities.

On top of these revelations, there was the release of large amounts of inside information connected with the organization called WikiLeaks. This, apparently, has had some impact on middle eastern events as well as disclosures relating to military and diplomatic relationships. We were reminded once again of this release of this “secret” information in the article in the New York Times Magazine, “The Boy Who Kicked The Hornet’s Nest” which appeared over the weekend. (http://www.nytimes.com/2011/01/30/magazine/30Wikileaks-t.html?adxnnl=1&ref=magazine&adxnnlx=1296651604-/6As33QJtY/sr5n+tM0J5w)

Information spreads and, although it may be contained in the short run, over the longer run its spread cannot be stopped. This is a major problem for governments.

The WikiLeaks adventure also spilled over into the business sector as several firms or banks were threatened with disclosures. But, the information “leakage” problem extends far beyond just WikiLeaks. Today, in Mr. Wolf’s paper, the Financial Times, there was a detailed piece on “industrial espionage” titled “Data Out of the Door.”( http://www.ft.com/cms/s/0/ba6c82c0-2e44-11e0-8733-00144feabdc0.html#axzz1Chh2pOYC)

“Cyber-spying has fast become a specific threat for many companies. ‘Industrial cyber-espionage is one of the biggest problems that all nations are facing,’ says Melissa Hathaway, a former US intelligence official and the leader of a digital security review set up by President Barack Obama.

The scale of hacking to gain corporate information has gone so far, she says, that the Securities and Exchange Commission…might soon need to require companies to assess routinely for the benefit of shareholders how well they are protecting themselves from electronic attacks.”

On the other side of the ledger, this fact also says a lot about what companies can and should
reveal to the investment community. People can get more and more company information these days and it is very important for a business to accept this fact and address the issue of how open and transparent it must be to earn the trust and confidence of the investing community.

Nothing can be worse for a company to be ‘”caught out” and have to admit it was hiding information from the public that should have been released.

Modern information technology is impacting business in another way raising all sorts of different questions. How closely can finance be regulated when finance, which is nothing more than information, can be transmitted around the world in seconds…or less? How can financial transactions be understood when financial information can be “sliced and diced” in any way it can conceivably be re-constructed? How fast can transactions take place? How fast should transactions be able to take place? How secure are all these transactions? How have “the Quants” changed their business practices since the melt down of August 2007? What other ways can the “physical” be transformed into just information?

Rahm Emanuel, formerly President Obama’s Chief of Staff, once stated that one should “never waste a crisis.” I believe that many people and organizations, especially people and organizations within the financial industry, acted this way during the crisis. As a consequence, the world is a very different place now than it was three and a half years ago.

The problem going forward is that many people and businesses are looking forward to what they can do in the future while many governments and other institutions, like religious groups, are only looking to regain the past. This divergence only adds to the uncertainty that Mr. Wolf observes in the world today.