Thursday, March 4, 2010
This morning's WSJ has an article suggesting that goods times are just around the corner for M&A lawyers. Actually, it's an article about the hole that is presently being burned in the pockets of managers as they sit on increasingly large cash-piles.
The 382 nonfinancial firms in the Standard & Poor's 500 that have reported results for the fourth quarter of 2009 are now holding $932 billion in cash and short-term investments, according to a Wall Street Journal analysis of data from Capital IQ. That sum is up 8% from the third quarter and up 31% from a year ago.
At a time of low interest rates, reopened credit markets and growing optimism about the economy, CEOs and their boards seem to be questioning the wisdom of sitting on all that cash. And with the S&P 500 still trading 29% below its October 2007 peak, companies are deciding that cash is their preferred currency for acquisitions—rather than shares they see as undervalued.
This is an old problem - but a good one. Having too much cash on the balance sheet is unproductive so what to do with it. My first thought has always been, is that what dividends are for? Apparently not. Reminiscent of arguments that lay behind the conglomerate movement of the 1960s, one observer suggests that dividends are bad.
"In many cases, if you use cash for share buybacks or dividends you are signaling to the market you don't have a better use for the cash," said Paul Parker, Barclays Capital head of global M&A. "For most CEOs, that message is the last one they want to send."
As if every manager had an endless font of profitable ideas to pursue... Here's a news flash: they don’t. There is limit. There’s always a limit. That’s one reason why we have a capital market – so that individual investors can allocate capital into portfolios that best meet their needs. I suppose we could let corporate managers do that, but we’ve been down that road before. Here's a good read on our previous experience with corporate empire building if you haven't already got it on your shelf: Sobel's The Rise and Fall of the Conglomerate Kings.
And it's not like there are all these targets out there just waiting to be bought. The weakness of the stock market over the past year also means that potential sellers are going to be less willing to sell at current prices. Boards are going to argue (as they are in AirGas/Air Products) that the market is getting its price wrong and that a sale at present is a bad idea (unless it can be done at a premium of historic highs). This might be why we are seeing what appear to be an uptick in hostile acquisition activity. Targets are resisting.
Against that, we might all be better off if good managers sitting on excess capital turned it back to their shareholders rather than pursue perhaps marginally profitable acquisitions. If managers took just 10% of the nearly 1 trillion in cash on the balance sheets of non-financial firms and sent it back to stockholders, that would be a $100 billion private sector stimulus that might even help somebody make a payment on their mortgage. That wouldn't necessarily be a bad thing.
OK, I'll get off my soap box for the rest of the day.