News: Analysis & Commentary
THE PROBLEM NOW: WHAT TO DO WITH ALL THAT CASH
Only 16 months after emerging from a messy bankruptcy, wallboard manufacturer National Gypsum Co. received a surprise $940 million buyout offer on Nov. 15 from a group headed by Chairman C.D. Spangler Jr. Why now? Thanks to new housing starts, Gypsum's profits are soaring. And the company lately has paid off almost all of its $100 million in debt. Most important, Gypsum is awash in cash--to the tune of $55 million. With further profit growth on the horizon, Spangler may not have much to lose. "Cash is cash," quips Barnes Hauptfuhrer, a banker at First Union Corp., which is co-funding the bid. "It's worth what it's worth."
It's also overflowing the coffers of Corporate America. Companies, enriched by surging profits through most of 1994, are churning out cartloads of cash. Their shareholders are the clear winners: Dividends paid out by companies in Standard & Poor's 500-stock index will jump about 5% this year and 7% in 1995, up from a 2% increase last year.
POUNCES. And the spree goes well beyond that. Capital spending, acquisitions, and debt repayment remain far more robust than many analysts had expected in the face of interest-rate hikes by the Federal Reserve Board. "As each month goes by, I see a higher degree of business confidence, despite increases in interest rates," says David J. Rudis, executive vice-president at LaSalle National Bank in Chicago.
Just how well are things going for U.S. companies? According to the Fed, corporate cash flow increased 12.3% during the second quarter of 1994. And 54% of U.S. companies reported better-than-Wall-Street-consensus earnings during the third quarter. The largesse has fueled an 8.8% hike in capital spending this year, says the Commerce Dept., topping the 8.3% increase it predicted in January.
With lots of cash on hand, companies are pouncing fast when they see a buying opportunity: Spending on acquisitions this year is expected to approach the 1988 record of $336 billion. The latest example: On Nov. 21, Rockwell International bested General Signal by agreeing to pay $1.6 billion--all in cash--for Reliance Electric, a maker of industrial motors. Rockwell could easily afford the bid because its industrial automation and auto parts businesses are spinning off tons of cash. Another recent bid: Drugmaker Amgen Inc.'s Nov. 18 deal to pay $262 million in cash for Synergen Inc.
But not everyone is hanging up bunting. "There's a palpable concern about a downturn," says Goldman, Sachs & Co. Senior Economist Edward F. McKelvey. With rates up, economist Laurence Meyer, of Laurence Meyer & Associates, predicts gross domestic product will grow only 2.9% next year, down from this year's expected 4% growth rate. And he figures pre-tax corporate profits will jump 5.1% next year. That's O.K., but well below this year's projected 12.5% increase.
Some companies already are moving to insulate themselves from the downturn. Appliance manufacturer Whirlpool Corp., which expects strong earnings this year and next, announced plans in mid-November to cut 3,200 workers and close two North American plants. Engine maker Briggs & Stratton Corp., despite recording earnings of $102 million on sales of $1.28 billion for the year ending in June--and expecting to do even better in 1995--plans to shift 2,000 jobs out of its Milwaukee factory to lower-wage sites in the Southern U.S. Says Chief Executive Frederick P. Stratton: "We have to think mf the long-term competitiveness of the company."
Some companies have been so bruised in recent years that they're simply using their good fortune to rebuild tattered balance sheets before the next downturn hits. Take the hard-hit airline industry. Recent profits have allowed NWA Inc., parent of Northwest Airlines Inc., to build a cash pool of $1.6 billion, at least $600 million of which it plans to use to pay down debt. American Airlines Inc.'s parent, AMR Corp., also aims to retire debt. Says AMR'S senior vice-president for finance, Michael J. Durham: "Our first priority is to repair the company's capital structure."
SPREADING THE WEALTH. Concern about the future at least partly explains why Ford Motor Co. and Chrysler Corp. are sitting on big piles of cash. Fat profits have allowed Ford to accumulate $9.2 billion by the end of the third quarter, up from $6.8 billion in 1993. But CEO Alexander J. Trotman feels justified in holding on to the booty. He expects capital spending to eat up more than $25 billion during the next five years. Chrysler has another concern: Investor Kirk Kerkorian is demanding that it pay out more of its $6.6 billion cash hoard to investors.
Many companies are plowing excess cash into markets overseas. Toledo-based automotive parts manufacturer Dana Corp., which reported earnings of $169 million for the first nine months mf 1994, up from $93 million last year excluding an accounting change, just opened a new plant in Thailand and plans further foreign expansion. Consumer products maker Procter & Gamble Co. has $2.4 billion in cash on hand and is using most of its strong cash flow to expand. It plunked down $607 million during the most recent quarter on acquisitions, most of it for a German tissue company.
Indeed, many companies seem to understand that to make money, they have to spend some. Take tiny biomedical company Research Industries Corp. in Midvale, Utah, which posted a sales increase of 39%, to $7.3 million, during the first quarter of fiscal 1995. It plans to put $1.5 million into new catheter manufacturing capacity, eliminating the need to outsource production. The move will save the fast-growing company $80,000 per month. The supplier, says Chief Financial Officer Mark W. Winn, "has been making about 40% margins." Like many U.S. executives, Winn is betting the good times will keep rolling long enough to make today's moves pay off.Kevin Kelly in Milwaukee, with Richard A. Melcher in Chicago, David Greising in Atlanta, Zachary Schiller in Cleveland, and bureau reports