This is supposed to be the year where cash-rich companies put that excess cash to better use. But activists lurk.
The mantra for 2011 is that companies with large cash piles will go on M&A sprees to start putting that money to better use. Other plans include, of course, buying back stock or paying out in dividends. But it may turn out that investors less of the former and more of the latter – they just want the cash.
So where treasurers see grand M&A plans, or innovation-inspiring safety nets, activist investors see dithering. Take Christopher Bonavico, a portfolio manager at Delaware Investments, who told the Wall Street Journal that he wants Apple to do something with its money – namely give it back to shareholders. Apple is “leaving money on the table by having such a large cash balance well below their cost of capital,” Mr. Bonavico said. “The cash is earning near zero.”
While it might seem like dithering, companies are considering giving back the cash in one form or another. A survey of The NeuGroup’s Treasurers Group of Thirty (T30) taken in October of 2010, revealed a split between investing in the business through acquisitions or strategic growth and distributing cash via share buybacks or debt retirement (see Weekly Data Point here). Those that have communicated with their major shareholders or seen polls done by their bank analysts indicated similar splits.
This is certainly not the first time treasurers have faced this kind of activism. Back in 2007, many were under the same sort of pressure to explain why their companies were sitting on large piles of cash while their share prices languished. In this case, yields are extraordinarily low, as Mr. Bonavico points out (and Apple stock has done extraordinarily well). But again, treasurers are aware of this and have been making a push over the past two years to increase yield. According to a fall 2010 survey of The NeuGroup’s Treasury Investment Managers’ Peer Group (TIMPG), most members are doing this by increasing duration or increasing credit risk.
Although one activist investor does not a trend make, these situations can snowball. The WSJ notes that dissent is growing among several other shareholders, although none have done so publically. Back in 2007, after a lot of noise from individual investors, at least two mutual funds – T. Rowe Price and Oppenheimer – also joined the hue and cry, pushing boards to change capital structure.
Perhaps the best course for treasury and the company’s board is to be more communicative with big shareholders and let them know that doing something with the money is as top of mind as it is for anyone else.