Companies are currently sitting on more cash than at any other time in the last 50 years. Cash and other short-term assets now account for 7% of all assets at non-financial US companies. If you exclude finance firms, US companies held $1.8 trillion in cash and short-term assets at the end of the first quarter, which is 26% higher than the same time last year and represents the biggest increase since the Federal Reserve started tracking cash levels in the 1950s. According to a recent CFO magazine survey and article, companies within the CFO Midcap 1500 (companies with $100 million to $1 billion in annual sales) are holding 15% more cash in 2010 than the same period two years ago.
While it may seem counterintuitive that such high levels of cash exist at corporations when the wider economy is struggling, those companies that are generating a lot of cash believe that having high liquidity on their balance sheet makes them a safer and more attractive partner to their clients. And given the fact that credit markets were frozen for a while and are only now slowly starting to thaw, there is a strong argument for maintaining high cash levels. In June 2009, Edward Liebert, National Association of Corporate Treasurers was quoted as saying: “You can miss your earnings targets and survive, but you can only run out of cash once.”
When will Companies Spend Spend Spend?
At some point, owners and shareholders are going to want management to put cash to work. And if we were to write this blog with a narrow and self-serving perspective, it could be HIGH CASH LEVELS = MAJOR INCREASE IN M&A. After all, as M&A Advisors, ClearRidge’s business benefits from increased M&A volumes.
In fact, results from a recent survey by the Boston Consulting Group, reveal that Mergers & Acquisitions continued to be the primary justification for managers hoarding cash, with 43% of respondents stating that strategic M&A should be the leading priority of companies with excess cash.
In reality though, large cash piles at corporations will only increase M&A volumes if management start deploying that cash. And so far, most have been playing it safe. And, in hindsight that’s been a wise decision as the companies holding the highest proportion of cash to assets have been valued by investors at a premium to their cash skinny counterparts for quite some time.
The more likely scenario for M&A volumes is that companies slowly start responding to shareholder pressure and turn to M&A as one of a variety of ways to try and increase their return on assets.