In the past several years, instead of spending cash on hiring, new machinery, R&D, or dividends, CEOs have just been sitting on it. Huge, useless mountains of dollars, yen, euros, and pounds sterling. …This would seem to be good news for the stock market and the economy in general. Just like other "technical indicators," this one says that corporate pessimism has produced a huge reserve of money available for investment, which could provide a significant stimulus to the economy and the stock market.
If executives sit on too much cash for too long, management or outsiders will seek to take the company private in a leveraged buyout and use the existing cash to pay down the debt. And as Gregory Zuckerman noted, aggressive investors like Carl Icahn, who are targeting "cash-rich companies such as Siebel Systems and Mylan Laboratories, Inc.," stand up and demand that if management can't think of anything to do with the cash, they should give it back, either through dividends or stock buybacks. Indeed, Zuckerman notes that "buybacks surged 91 percent during the first quarter of 2005 and rose 64 percent during the past year."
In the end, CEOs will likely be motivated to unwind the savings glut not by outside pressure but by the factor that motivates them above all else: self-interest. The crew from JP Morgan notes that the corporate-savings glut is probably partially responsible for the equity markets' poor performance of late. All the cash sitting on the sidelines is a signal to investors that insiders don't think this is a great climate to be investing. Once corporate cash is put to work—prudently—to buy back stock, purchase other companies, or to invest for growth, that should help push stocks higher. And while a rising tide lifts all boats, it lifts the yachts of the bosses highest.
Wednesday, July 13, 2005
Useless Piles of Cash
Daniel gross in Slates says that corporations have a huge stash of cash.