The end of CEO Scrooge? – Business Spectator

For the past few years now US chief executives have been doing their best impersonations of Disney’s miserly uncle, Scrooge McDuck.

The economic headwinds following the 2008 crash saw many companies squirreling away cash in case darker days were ahead.

In an academic paper for the Stanford Institute for Economic Policy Research, Professor Laurie Hodrick from Colombia University found that non-financial corporate businesses in the US had a record $US1.79 trillion ($1.96 trillion) of liquid assets as at the end of 2012, a figure that has been steadily increasing even before the American recession.

Five companies – General Electric, Microsoft, Google, Cisco and Apple – account for about a quarter of these assets, with 22 companies accounting for half.

“The decision to undertake mergers and acquisitions is far more complex than simply whether a firm holds cash,” Professor Hodrick told Business Spectator.

She said that the main reasons companies keep so much cash on balance sheets are either because they want some financial flexibility in times of uncertainty or often to avoid the tax consequences of repatriating foreign earnings.

“If the economy continues to recover and uncertainty about future growth rates and fiscal and monetary policies declines, the option value of holding cash will decline,” she said.

“If heightened uncertainty continues, however, these firms will continue to hold high cash levels.”

Holding onto a lot of cash doesn’t play well with investors either, who would much prefer the money be paid back to them in the form of dividends. In April this year, Apple succumbed to that pressure, announcing it would give back $US100 billion in cash to shareholders by the end of 2015 – the largest payout ever.

But most of the important economic signposts in the US are pointing towards a continued, albeit sluggish, recovery. Car sales figures released this week found Americans are even starting to buy locally manufactured cars again – Ford, General Motors and Chrysler all posted double-digit sales gains in August.

Perhaps emboldened by the favourable economic signs or in the knowledge that lending rates are not going to be near zero forever, two US companies flung open the till this week to part with some serious money.

In the third biggest transaction in history (after Vodafone’s $US203 billion takeover of Germany’s Mannesmann in 2000 and AOL’s less than successful $US181 billion merger with Time Warner in 2000), Verizon finally ended its own unhappy marriage with British telco Vodafone, agreeing to pay $US130 billion for Vodafone’s 45 per cent share in Verizon Wireless.

Then, just a day later, Microsoft said it would spend $US7.2 billion to pick up ailing smartphone maker Nokia. 

Even consumer products company Jarden got in on the action, spending $US1.8 billion on scented candles through its purchase of the privately held Yankee Candle.

The Verizon deal, while coming in at the top end of expectations, is really a no-brainer.

The company has wanted to buy Vodafone’s share for more than a decade and it strongly believes in forecasts that say the worldwide $US1.6 trillion wireless industry will become a multitrillion-dollar market within the next decade.

New rivals have entered the wireless space in the US and with $US20 billion of Verizon’s $US30 billion in revenue coming from its wireless business in the last quarter the company wants to see those profits on its own balance sheet and not on Vodafone’s.

Microsoft’s pairing with Nokia resembles something more akin to a Shakespearean tragedy. Remember the days when we all used Windows and when you would replace your old Nokia phone with a newer Nokia model? Both companies have squandered their industry-leading positions in different markets, but both to the same competitor – Apple.

Microsoft already powers Nokia smartphones with its operating system but its share of the market is down to 3.3 per cent from 11 per cent in 2008.

In the most recent quarter, Microsoft shipped 8.7 million phones running its Windows Phone software – a third as many phones as Apple, and a 20th the number of phones shipped with Google’s Android.

Basically both Verizon and Microsoft had to make a move. But does that mean other companies are likely to join them in the acquisitions space?

Yahoo chief executive Marissa Mayer has been something of a lone wolf stalking the mergers and acquisitions market this year, having spent about $US1 billion acquiring 20 mainly start-up companies.

PricewaterhouseCoopers thinks that many companies may still follow Mayer’s lead.

The firm’s global survey found that 42 per cent of the 167 US chief executives it asked planned a domestic acquisition in 2013. If those plans come to fruition then we will see a considerably stronger trend than the 30 per cent of who actually completed a transaction in 2012.

“The US deals market, while in better shape than some markets elsewhere, remains restrained. Increasing interest in strategic alliances is a factor, yet the fundamentals for growth in the deals market are in place,” PwC said.

“Fiscal and economic uncertainties loom large, yet there are some sector-specific shifts in play that may drive activity. Sweeping reforms in the Affordable Care Act are likely to spur consolidation as healthcare revenue models change.”

With company fundamentals sound and the US economy continually improving, the best bet is that companies will shrug off the mentality of the past few years to hoard cash and instead focus on growth. Notwithstanding Marissa Mayer’s takeover binge, Microsoft and Verizon’s moves this week may provide the amount of confidence chief executives need to take the plunge towards a balance sheet that is less cash-heavy.

Mathew Murphy is a Walkley Award Winning journalist based in New York.