HSBC webinar explores the great cash hoarding mystery and other cash management issues.
Companies, at least many of the biggest ones, are continuing to accumulate vast caches of cash and the reasons are varied, according to panelists in a recent HSBC-sponsored webinar.
“Don’t fight the last battle,” warned Ataman Ozyildirim, Ph.D., Economist and Director, Business Cycles and Growth Research, The Conference Board, adding that in the wake of the Great Recession companies have become accustomed to building cash levels to deleverage and protect against further credit market instability.
“They now need to look at the next couple of years as interest rates normalize and the business cycle matures, because the landscape is going to be very different, with likely a bit more inflation and wage pressure rising. Profits may come under pressure, and some of those cash balances will start to have a different meaning,” he said.
Zac Nesper, VP and assistant treasurer at HP Inc., pointed to the “tectonic shifts now taking place in terms of technology, ranging from software as a service (SaaS), to cloud services, to the shared economy and device mobility. He noted that 173 “unicorns,” or private companies with values of more than $1 billion, have been created since 2011.
“Companies are looking at their balance sheets to have firepower for M&A and being able to compete in this volatile environment, and that’s why they’re holding cash,” Mr. Nesper said.
That appears to be a major factor in information technology, biomedical and other fast-growing sectors. Drew Douglas, regional head of payments and cash management at HSBC Bank USA, said the tech sector is “definitely the lead” in terms of holding cash, especially among the biggest names, but consumer goods, healthcare and energy are trending similarly. “It’s not just by industry, but where companies are in their lifecycles, and what opportunities they’re seeing from an investment standpoint, and whether they’re choosing to return [cash] to investors,” Mr. Douglas said.
Noting the maturing business cycle in the US, nearly seven years into expansion, Mr. Ozyildirim said that increasing competition will result in diminishing returns, another reason companies may be reserving cash. Europe’s cycle, however, is at an earlier stage, while emerging markets are all over the map, creating a complex global picture, he said.
Long-term vs. Short-term Growth Objectives
Panelist moderator Josselyn Simpson, managing editor, Americas, at the Economist Intelligence Unit, noted that companies are deploying excess cash in dividends and share repurchases, and much less so in research and development and new investments. She asked whether companies should feel more of an obligation to pursue longer-term growth.
Mr. Douglas said shareholders are clearly indicating through valuations whether they see companies making good use of excess cash or not, by attaching a premium to those that are and discounting those that aren’t. “They’re saying, for example, that technology companies may hold on to more cash because of the opportunity to deploy it in the market they’re in,” Mr. Douglas said.
Mr. Nesper argued that there are “natural checks and balances” in the market regarding the amount of money companies can hold, noting that money flowing into activist-investor funds has been on the rise. “Companies like HP are doing exactly what shareholders want them to do,” he said, pointing to Hewlett Packard’s own recent split into units viewed as better able to compete. “They’re looking at all the investment opportunities they have available, putting M&A, dividends, capital expenditures, and organic investments side by side and trying to figure out where they the get best return in a volatile economic environment.”
Short-term Investment Priorities
In terms of the impact of historically low and even negative interest rates on cash management, Mr. Douglas said that with rates so low the banks’ clients are prioritizing counterparty risk over yield.
“More and more treasurers are not chasing yield and instead are looking for more efficient working capital solutions,” he said, adding, “They’re trying to ensure the cash liquidity they have isn’t at risk, because the opportunity is actually on the other side of that.”
Mr. Nesper differed somewhat on the issue, recalling his attendance at a meeting of 20 or so treasurers in Silicon Valley the week before, and “the amount of time being spent by treasurers to find the European bank that wants the deposit and is willing to pay for it.” He added that exceptionally low inflation environment makes a low nominal yield “not as bad as it seems.”
In fact, new regulations such as Basel III have made banks unwilling to even take some deposits, never mind provide yield. The panel noted that banks are still hungry for operational deposits, which are considered more stable. But new capital requirements make excess cash, considered flightier and less sticky, problematic for them. “When we were splitting Hewlett Packard in two, we needed to do a $15 billion bond deal and there was going to be a two week period between when we raised the cash and paid down some existing bank debt with it, and I had a very hard time find a money market fund that would take it,” Mr. Nesper said. “What amazing world we’re living in when banks don’t want money.”
Cash Management Strategies Remain Static Despite Volatile Environment
The webinar also electronically posed several questions to viewers, one of which was whether companies had actually changed their cash holding policies since the 2008 financial crisis. Despite record-low interest rates and significant regulatory and legislative changes, however, 41% of participants said they had made only small adjustments and 34% said they had not altered their approach; only 25% said they had made large adjustments.
Mr. Nesper noted that large MNCs such as HP tend to have big cash balances and more flexibility to opt for the best short-term investment options, whereas many companies’ cash is devoted to working capital, so it’s harder for them to change their investment mix. “It would be interesting to know how [those percentages split] according to the size of the company,” he said.
Mr. Ozyildririm noted that such static cash-management policies may provide at least part of the explanation for why central banks’ monetary policies to generate economic activity have had muted impact.
Asked about the challenges in managing HP’s cash across borders, Mr. Nesper said regulatory changes have created both opportunities and risks. The company now has greater access to cash than it did just a few years ago, such as in Europe where record low rates have prompted a rush of issuance by US companies. But volatility around the globe, whether it’s political unrest in Latin America or currency swings in Asia, has complicated the process.
HP, he said, relies on local teams who know the environment to address many of the issues. However, the company has acknowledged the efficiency benefits of centralizing treasury by creating regional hubs that have their own technology platforms. “We’re a big company and err toward some centralization, but we have those pockets to handle the local eccentricities,” Mr. Nesper said.
Choosing IT Solutions
The Economist Unit’s Ms. Simpson asked how companies go about choosing their cash-management technology solutions. With the advent of SaaS and cloud solutions, said HSBC’s Mr. Douglas, the technology environment is changing rapidly, but some clients have chosen to continue managing cash using Excel spreadsheets. “The larger companies almost look at it almost from a return-on-investment perspective,” he said, adding, “They look at how much bandwidth they have and how much efficiency could be gained.”
Mr. Nesper remarked on his ability today to get a report each morning detailing how much cash HP has around the globe that allows him to drill down by country, bank account and even business entity. “The access technology that provides treasurers to access information is amazing,” he said. He said he sees technology evolving to provide much more granular insight into areas including supply chains, customer relationships, and working capital flows. However, no solutions are without holes, so in the case of treasury management systems (TMS) corporate treasuries will often bolt on what they see as best-of-breed FX, payment-settlement or other modules.
“It’s expensive and it takes a lot of work, but for the companies who do it well, the rewards are immense on the back end,” Mr. Nesper said.