One of the major features of the financial crisis has been the fact that companies have been holders of lots and lots of cash. Whether due to a lack of investment opportunities, the ability to borrow cheaply, leaner and meaner businesses structures or a combination of all three, corporate cash levels have never been higher.
What to do with all that money continues to be top-of-mind for companies and their treasurers. At a recent NeuGroup Tech20 Treasurers’ meeting, members discussed — and listened to experts – how they should approach cash. One panel of fixed income and equity investors told members that ultimately businesses should do what’s best for their own concerns. But the consensus, from both an equity and fixed-income investor perspective, was to take the long view.
Panelists encouraged approaching cash with ten-year horizon and urged them not to give in too much to activists or overdo cash return in the near term. But at the same time, they should also not hoard cash just for the sake of it. Fixed-income investors, moreover, according to one fixed-income panelist, actually want firms to do well for equity investors. But they want growth to be sustainable so that what is ultimately good for equity ends up also being neutral-to-good for fixed income.
The taxman and the storyline
Another panelist suggestion was that companies should face facts that they will have to pay taxes at some point. The suggestion here is that there may eventually be an end to borrowing as a repatriation substitute. At some point, other panelists agreed, maintaining unjustifiable cash levels just because they are off-shore will create a trap for firms that they eventually will need to escape from before doing things that they are better off not doing.
Still another suggestion was to get good a story telling. Tell a more compelling story as to why you hold cash. The panel also suggested that so far tech companies have not offered investors compelling enough stories as to why they need to hold so much cash. Complementing this story should be an assessment of opportunities to use the cash over the long run, ranking opportunities from best to worst. Holding cash may suggest that better opportunities are expected in the future, for example.
Taking a long view, as the investor panel encouraged, members may see that the post-World War II period has been somewhat anomalous in terms of returns on equity (7.2 to 7.4 percent on the S&P), which have been significantly higher than fixed income. So firms using buybacks to keep trying to get multiples higher, rather than merely to offset option grant dilution, is unlikely to be sustainable. Seen this way, the current dynamic created by the Fed might be described as leading firms to use artificially cheap debt to buy artificially expensive equity. This can mask changes to a given firm’s enterprise value, but eventually the focus will return to real drivers of long-run enterprise value.