$1.6 Trillion. Now We're Talking Stimulus
A check for $300? $600? $1,600? Uncle Sam's treating, so it's all good. Oh, tax rebate, imagine the places we'll go! Best Buy (BBY). The Olive Garden (DRI). Foreclosure arbitration. In a totally unrelated development, annotated copies of our national debt will now be available in both Mandarin and Cantonese.
But before you get stoked over just $150 billion in tax aid, forget not the huddled, cuff-linked masses, those with millions of fiduciary mouths to feed but who are too scared to spend. American CEOs, with hundreds of billions at their disposal, could make more of a stimulative difference than all of our shopping sprees combined.
Corporate Coffers Overfloweth
For all the doomsaying, corporate cash abounds. According to Moody's Investors Service (MCO), a record $1.6 trillion in cash sits on the books of nonfinancial U.S. companies, $600 billion more than was there five years ago. This is both an asset and a liability, as the 13-figure mother lode is sure to draw hungry eyes.
The stars have aligned for corporations to start shelling out. Assets are in play or just plain cheaper than they were months ago; buyout shops are overextended and actually backing out of deals; debt is vexingly hard to score. Snooze, and some Beijing banker or Gulf sheikh will beat you to the punch.
So why the holdup? Obviously, executive worry outweighs opportunism. Defaults are on the rise, rekindling memories of all the bankruptcies of the last bust. A peerless credit rating, backed by triple reinforcements of cash, means something again. "CEOs want to be vindicated for sitting on their hands for all these years," says one analyst. But what good is cash that just sits there forever? Fred Lane, a veteran Donaldson, Lufkin & Jenrette dealmaker who now runs his own banking boutique, feels that most CEOs who hoard cash don't really understand how attractive that in-house financing is for opportunistic deals: "I tell my clients, 'I don't get you guys. Why are you so passive?'"
Deal Us In
Mind you, this is not about charity. It's that too much conservatism can come back to bite companies. "Management is admitting that they just see no opportunities," says Ivan Feinseth, chief investment officer of AlphaWorks, a Manhattan hedge fund that screens investments for how efficiently they use capital.
And that will further dispirit the rest of us when we are supposed to be feeling our stimulative oats. According to Citigroup (C), the stock market's 15% drop in the past three months may have lopped more than $2.5 trillion off U.S. household net worth. This actually overshadows the decline in housing wealth during that stretch and more directly erodes the confidence of the top 20% of American income earners, who comprise 40% of the consumer-spending pie. A falling Dow is its own self-fulfilling prophecy, taking investment and payrolls down with it. A recovering market and deal book, on the other hand, would temper the negative-wealth blow of the housing bust. Consider how Microsoft (MSFT)'s blockbuster bid for Yahoo! (YHOO), a prime example of M&A self-determination, just eclipsed a crummy jobs report.
With financing so hard to come by, cash-rich companies are uniquely positioned to breathe animal spirits back into the market. Until recently, a record number of activist hedge funds prodded boards to plow their surpluses into share buybacks and fatter dividends, the better to repel private equity ardor. Some agreed and took advantage of generous debt markets to give money back to shareholders. In 2007 nearly $600 billion made its way to S&P 500 share buybacks. For the first time since 1995, executives are buying more shares for their personal accounts than they're selling.
"Carrying a Bag of Bricks"
But many others, spanning all sectors, have kept their purse strings tight. And that carries its own cost. "Excess cash," says Feinseth, "is just bad for the business." He explains that parking so much cash in low-yielding reserves dilutes a company's overall return on capital, something that is most increased by investment. And we're not talking spare change in the sofa: Feinseth calculates that drugmaker Wyeth (WYE) has 23% of the value of its stock price in excess cash, Tyco (TYC) 25%, and Eastman Kodak (EK) 30%. Novell (NOVL), a company with a 1.6% return on capital, is at more than 82% excess cash. "It's like trying to run a marathon while carrying a bag of bricks."
Prediction: This passivity will not stand. In a hyperglobalized, weak-dollar economy, U.S. balance sheets have never been so prone to international scrutiny. Cash is fungible and speaks all languages. It appeals to every constituency, from employees and shareholders to lawmakers and creditors, from Wall Street analysts to labor unions. Leave too much of it out there, and you will be told what to do with it.
Credit crunch or not, corporations cannot masquerade as glorified money-market funds.