Wednesday, April 21, 2010

The problem with too much cash

Too much cash. An envious position to be in, but there are a few companies in this predicament. What do you do with all that cash ?

Apple is the best example of a company with a massive cash problem. Yesterday they announced results that blew the market away. But they also have a problem. Cash. Lots of it lying idle. Actually $42bn of it. Earning a princely return of 0.75% per annum. And they are likely to generate another $14bn of it this year.

Microsoft is a long time hoarder of cash. At last count they had some $40bn. Google has $25bn, Intel $19bn. Its not all tech companies in this list. Exxon still has $11 bn after returning $26bn to shareholders last year.

So what do you do if you have this problem ?

You can put it in the bank, as most of these companies have done. And earn virtually nothing on it. A significant proportion of the value you generate for shareholders by running your business, is destroyed by the act of digging a hole in your backyard and burying the cash.

Or you can be tempted to try and earn more on it by starting to take risks in investing it in financial markets. That’s a slippery and dangerous slope, but there isn’t a single corporate treasurer who isn’t tempted to do so.

More dangerous alternatives exist. CEOs with cash piles are sorely tempted to spend it. In a nice headline grabbing acquisition. Show me one CEO who doesn’t like to see his photo in the papers. A mega acquisition is guaranteed to get him just that. The cash that’s burning a hole in the pocket tempts you to go out and do something. Especially as hot shot investment bankers are constantly telling you to do so.

Or you can return the money to shareholders. Either as dividends or as share buy backs. Shareholders sometimes love this, but they tend to forget it the next minute. And somehow giving it away is interpreted by the market that you don’t know what to do with it and therefore your future is not bright – so beat down your share price a notch.

Too much cash also can have a dampening effect on companies sometime. When you are struggling for cash and watching the bank balance every day, you value every cent and hoard it. When you have too much, you get lax. Minus the pressure, corporates do get complacent. They also continue to do strange things. Such cash rich companies still ask for 60 days supplier credit even though the cost of borrowing of their supplier (which is included in the price) is much more than the investment returns they are getting.

So what do you do ?? As in life, so in business – too much of even a good thing can be a problem !