Huge cash pile puts recovery in hands of the few

January 21, 2014 7:03 pm

Huge cash pile puts recovery in hands of the few

By Anousha Sakoui, M&A Correspondent

The pile of unspent corporate cash that has built up since the start of the financial crisis is being held by an increasingly concentrated pool of companies that will be crucial to hopes of a pick-up in business investment to stimulate the world economy.About a third of the world’s biggest non-financial companies are sitting on most of a $2.8tn gross cash pile, according to a study by advisory firm Deloitte, with the polarisation between hoarders and spenders widening since the financial crisis.

This will have a big influence on whether 2014 will bring a revival in capital expenditure or dealmaking, warned Iain Macmillan, head of mergers and acquisitions at Deloitte. “Looking ahead, the wave of cash that many are expecting will depend on the decisions of a few, rather than the many,” he said.

Of the non-financial members of the S&P Global 1200 index, just 32 per cent of companies held 82 per cent of the aggregate cash pile, the highest level since at least 2000. With nearly $150bn in its coffers, Apple alone was sitting on about 5 per of the total at the end of its fiscal year.

Such concentration has increased since 2007 when companies that held more than $2.5bn in cash or “near cash” items – not including debt – accounted for 76 per cent of the aggregate cash pile in 2007.

The study focused on gross cash holdings rather than subtracting their debt in an effort to simplify comparisons over time and identify how much money companies have to hand.

The study comes amid increasing investor calls for companies to step up capital spending. An influential survey of fund managers conducted by Bank of America Merrill Lynch released on Tuesday showed a record 58 per cent of investors polled want companies’ cash piles spent on capex.

A record 67 per cent said companies were “underinvesting” and less than a third of asset managers surveyed want companies to return more money to shareholders – the usual complaint of investors.

“A key issue that will determine the pace of recovery and return will be the extent to which companies step up to the plate and put their cash balances to work in generating growth,” said Keith Skeoch, chief executive of fund manager Standard Life Investments.

Recent analysis by Standard & Poor’s has showed how cash hoarding has damped investment. If the ratio of cash held by companies to their assets had followed a more “normalised” recovery path in 2012 and 2013, an extra $900bn of cash would have been spent by the global non-financial corporate sector over those two years.

Cash hoarding is blamed by some economists for some regions’ slow emergence from the crisis. As companies keep operating costs low and do not invest in equipment, their wealth does not trickle down to benefit the wider economy.

But the analysis of cash hoarding during the crisis is complicated by rising net debt levels since 2007, as companies have taken advantage of record low interest rates to issue debt. This in turn could affect willingness to spend on M&A or capex, or whether to return cash to investors.

Deloitte’s study reveals though that hoarding cash has hit companies’ share prices and revenue growth in recent years, as companies with low cash balances have done better on both measures than companies with large cash reserves.

Mr Macmillan at Deloitte said: “Small cash holding companies which have been more aggressive in their pursuit of growth have seen their revenue growth and share price performance outperform their richer counterparts.”

Some analysts forecast capex will rise in 2014 in response to investor concerns that cash-rich companies are underinvesting.

“Firms will likely need to work harder to drive returns,” said John Bilton, European investment strategist at Bank of America Merrill Lynch.