By John Hintze
At what cash level does an activist take an interest in your company?
When corporate cash reaches 10% of a company’s market capitalization, has it arrived at a level that attracts activist investors?
At a recent NeuGroup Assistant Treasurers’ Leadership Group (ATLG) meeting, one member noted analysts’ and investors’ tendency to look at cash as a percentage of market capitalization because it is easy to benchmark across different companies and industries. The member added that a banker had recently called 10% the line above which a company may attract the attention of activists. Acknowledging the potential randomness of that number and the need to also consider other financial multiples, she asked for the group’s perspective.
“It would be nice to have some kind of red flag, saying that at this time we’re not moving cash fast enough” to avoid the interest of an activist. —ATLG member
“There’s so much that would be company-specific, but it would be nice to have some kind of red flag, saying that at this time we’re not moving cash fast enough,” she said. “There’s no big M&A in the pipeline, so we need to start thinking about and maybe messaging a bigger share buyback program or dividend.”
A banker in the session called the notion “very interesting,” noting that cash as a percentage of earnings would be more informative. The member agreed, but added that market capitalization simply made for an easier comparison.
No one else at the ATLG meeting acknowledged encountering the 10% threshold, although several said their companies’ upcash far exceeded it. One member placed his technology company’s cash-to-market-cap percentage at 35%, well above peers’. In an industry with little capacity for organic investment, he said the company must resort to M&A and returning capital to shareholders. It retired about 15% of its debt last year.
Another member said his large social media company’s cash was about 20% of its market cap, likely covering a few years of operational expenses, but he said it must be ready to compete on the M&A front against peers with much deeper pockets.