The Growing Corporate Cash Hoard

OverseasLast week, investor David Einhorn sued Apple, in which his hedge fund has a large stake, over how the company can issue preferred stock. At heart of the dispute is the $137 billion pile of cash that Apple has accumulated, and whether it could be used to better reward shareholders. Mr. Einhorn’s action highlights a growing problem: many corporations are holding vast amounts of cash and other liquid assets, using them neither for investment nor to benefit shareholders. These assets are largely earned and held overseas, not subject to American taxes until money is brought home. Such tax-avoidance techniques, while legal, have come under increasing political attack. On Thursday, Senator Bernie Sanders of Vermont introduced legislation to end deferral and force multinational companies to pay taxes on their foreign-source income. According to Federal Reserve, as of the third quarter of 2012 nonfinancial corporations in United States held $1.7 trillion of liquid assets, cash and securities could easily be converted to cash. By any measure, corporate cash holdings appear to be high, rising. According to the Federal Reserve, nonfinancial corporations historically held liquid assets of 25 to 30% of their short-term liabilities. But this percentage began rising in 2001 and now tends to be in the 45 to 50% range. In third quarter of 2012, it was 44.9%. A recent study by Juan Sánchez and Emircan Yurdagul of Federal Reserve Bank of St. Louis looked at ratio of cash to assets at all publicly held nonfinancial, non-utility corporations. They found, historically, such corporations held cash equal to about 6% of their assets, but that began rising in 1995 and is now more than 12% One obvious explanation for higher cash holdings by corporations is the uncertainty of the economic environment in the aftermath of financial crisis. They may also face greater difficulty in getting credit on short notice and need to hold more cash as a precaution. Another explanation, put forward by the economists Thomas W. Bates, Kathleen M. Kahle, René M. Stulz, is that growing research-and-development intensity of corporations forces them to hold more cash than they used to. They note companies hold fewer inventories and accounts receivable than they used to. And, they say, these factors make corporate cash flow less dependable than previously, thus necessitating the need for higher cash holdings. A 2011 study by the International Monetary Fund suggests that higher cash holdings by corporations are simply a sign they plan new investments in the near future. It says this is a “good omen,” which indicates “investment could increase substantially over next year or two”. However, dominant explanation for the increased liquidity of nonfinancial corporations appears to be growing role of multinational corporations, profits of their foreign operations (…..)



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12 Responses to The Growing Corporate Cash Hoard

  1. Professor Uziel Nogueira says: Bruce Barlett’s critique of how US based transnational corporations deal with profits kept in overseas tax havens goes to the heart of the existing US business model. A federal debt reaching 100%/GDP is pushing the tax collector to seek money wherever it can. Naturally, the huge amount of money kept overseas by local corporations is a target to good to be ignored. The preferential tax treatment received by transnational corporations is no longer fiscally sustainable. In sum, the golden era of unfettered financial-business capitalism seems to be ending in the US and Europe. Not because of lack of ideological faith by the political system. But because of lack of money by the federal government.

  2. There’s plenty of money in the world. That’s the good news. The not-so-good news: The flood of dollars, euros, yen and pounds pumped into the global economy by major central banks in recent years has yet to pay off in the form of job creation, investment and stronger economic growth. It has kept banks afloat, let corporations build large cash reserves and restructure debt and, arguably, staved off a worldwide depression. But the ultimate aim — strong and self-sustaining growth in the world’s core industrial economies — remains out of reach, and analysts are wondering whether central banks are at the limits of what they can do to help. For three of the four central banks involved, their local economies remain in recession or have flat-lined despite years spent in crisis-fighting mode. New data Thursday showed that economic output in Europe fell more sharply than analysts expected at the end of last year, with gross domestic product in the 17-nation euro zone declining 0.6 percent in the last three months of 2012, compared with the prior period. Growth in Britain was zero percent, while Japan’s economy contracted 0.4 percent at the end of the year. This stagnation follows a historic run in which $5.5 trillion has flowed into the global economy from central banks in the United States, Japan, Britain and the euro zone. “This is a very unique situation, and we cannot exclude that we are overtreating the patient,” said Domenico Lombardi, a former Italian board member of the International Monetary Fund and now an analyst at the Brookings Institution. “There has been huge liquidity pumped into the system, but only a fraction translates” into economic support for businesses and households in those economies. “Each successive effort at quantitative easing has had diminished returns. There are limits, and we are probably at the threshold” where more central bank action could do more harm than good to the global economy, said Timothy Adams, managing director for the Institute of International Finance, a trade group representing the world’s major financial institutions. The paradox of a cheap money/ slow growth world will be at the center of talks this week in Moscow among finance and central bank officials from the Group of 20 (…..)

  3. (…..) The IMF, charged by the G-20 with looking at how policies in different nations affect the global system, has so far remained on the side of the major central banks — agreeing that their policies have been justified by weak domestic conditions and have so far done more good than harm in the world as a whole. But there’s also a recognition that the results are unimpressive in terms of growth, while pushing the world into uncharted territory. The IMF has begun an extensive line of research on global liquidity conditions in an effort to better unravel how monetary easing in one nation, for example, affects economic conditions both at home and elsewhere. “Liquidity” is a concept broader than cash or a nation’s money supply. It includes the overall ability and willingness of financial firms to borrow and lend — something that can be shaped by factors as general as the state of the global economy, and as specific as the rules a central bank sets for loans it makes to financial institutions. One broad finding: Liquidity among the top economies – the United States, the euro zone, Britain and Japan — has largely recovered since the onset of the 2008 financial crisis. Money, in other words, isn’t the problem. But beyond that, the fund acknowledged, the state of current economic research and understanding does not say much about how global supplies of liquidity should be managed, or how they interact with national economies.

    “There is no theoretical framework to determine an optimal level of global liquidity, nor do we know how global liquidity should behave to promote sound, sustainable global growth with financial stability,” fund researchers concluded.

  4. Just days ago, the fate of a 144-year-old American icon was being hashed out in a Pittsburgh conference room as executives spoke by phone to representatives of two global billionaires who went by the code names “Owl” and “Goose.” Owl was Warren E. Buffett, chief executive of Berkshire Hathaway and one of the most admired investors in the world. Goose was Jorge Paulo Lemann, who became one of Brazil’s wealthiest financiers with 3G Capital. What emerged from the talks was a $23 billion takeover of H. J. Heinz, the maker of Heinz ketchup. The announcement of the deal on Thursday and the involvement of the closely followed Mr. Buffett served as confirmation that deal-making spirits have revived in corporate America. Yet the deal also signals the rising power of investors from once-emerging markets like Brazil. Armed with strong balance sheets and a growing domestic economy, Brazilian entities have emerged as prominent buyers of American companies like Pilgrim’s Pride, the chicken producer. 3G itself bought control of Burger King two years ago, leading an effort to revive the fortunes of the fast-food chain. In some ways, Heinz fits Mr. Buffett’s playbook almost to a T. Its global brand recognition approaches that of Coca-Cola and I.B.M., two companies in which he owns big stakes, and its financial performance is sound. Over the last 12 months, its stock has risen nearly 17 percent. Born from Henry J. Heinz’s horseradish business, Heinz has become one of the best-recognized food companies in the world, with its bottles of deep-red ketchup sitting on millions of kitchen tables. But it has expanded its offerings to include Ore-Ida French fries and Lea & Perrins Worcestershire sauce. For the year ended Oct. 28, the company reported $11.6 billion in revenue and $1 billion in profit. It generates a majority of its sales in Europe, but its Asian markets are growing quickly. And it has improved its net sales for eight consecutive fiscal years. “It is our kind of company,” Mr. Buffett told CNBC on Thursday. It fits comfortably alongside companies that Berkshire already owns, including the Dairy Queen chain. But Berkshire and 3G are paying a healthy price for Heinz. Under the terms of the deal, they will pay $72.50 a share, 20 percent higher than the stock’s closing price on Wednesday and 19 percent higher than its record high. Including debt, the transaction is worth $28 billion. The deal deviates from Buffett’s playbook in several ways. For example, day-to-day operations of Heinz will be in the hands of 3G. “Heinz will be 3G’s baby,” Mr. Buffett said on CNBC. Also, Berkshire is splitting ownership of Heinz 50-50 with 3G, with each company putting in about $4 billion in cash. Mr. Buffett will pay an additional $8 billion to receive preferred shares, which will pay him a hefty annual dividend of about 9 percent. The rest of the deal will be financed with debt arranged by banks. In some respects, the transaction more closely resembles a leveraged buyout, a type of deal that Mr. Buffett has criticized in the past (…..)

  5. Professor Uziel Nogueira says:

    The Heinz takeover is business as usual, a routine buying and selling of a company. What is highly unusual –and news worthy — is the deal being conducted by a Brazilian financier, Jorge Paulo Lemann of 3G. Perhaps, the 20th century business model is no longer.

  6. I WAS struck by one particular moment during President Obama’s State of the Union address. The president proposed a $1 billion investment to build a new National Network for Manufacturing Innovation to spur high-tech manufacturing in America. I’m sure that would be helpful, and I’m sure the president will have to beg to get any such funding out of Congress. Yet sitting up there in the balcony listening to the president’s speech was the chief executive of Apple, Tim Cook. Apple is currently sitting on $137 billion of cash in the bank. There are many reasons Apple has not spent its cash hoard, but I’ll bet anything that one of them is the uncertain economic and tax environment in this country. Think about how much better we’d all be if Apple, and the many other companies sitting on cash, felt confident enough in the future to spend it. These are the most dynamic companies in the world. They don’t need any government help to innovate. Message: There is no doubt our economy is primarily being held back by the deleveraging and drop in demand that resulted from the 2008 financial crisis. But they are being reinforced today by uncertainty and worry that we do not have our political house in order and, therefore, our tax, regulatory, pension and entitlement frameworks are all in play. So businesses, investors and consumers all hold back just enough for us not to be able to move the growth and employment meters with any robust momentum. Sure, we’ll throw money into the stock market if the only alternative is zero interest from bonds or banks, but it is not being recirculated with confidence in the long term. It’s a tragedy. You can feel the economy wants to launch, but Washington is sitting on the national mood button. We the people still feel like children of permanently divorcing parents. The latest Wall Street Journal/NBC News poll, conducted in mid-January, found that Americans see some signs of improvement but that “just over half of those surveyed said they were less confident about the economy as a result of the budget negotiations.” The Journal article quoted Bill McInturff, one of the pollsters, as saying, “This is now Washington’s economy. The problem in Washington is … contributing to a very negative sense of what’s going to happen in the economy.” Richard Curtin, who directs the Thomson Reuters/University of Michigan index of consumer sentiment, told me that his team regularly asks the consumers who are polled whether they’ve heard of any events impacting the economy — positively or negatively — without giving them any choices.

    Since August, the index has seen record numbers citing government paralysis as contributing negatively to the economy, including in the survey released Friday. “People’s incomes are so stretched,” said Curtin, “that any additional uncertainty about how taxes or government spending might affect them has a big impact on their situation and how they plan for the future. … There is real economic uncertainty out there.” In addition, he said, historically, “people have always turned to Washington in times of economic crisis, but now they’re losing confidence in the government’s ability to reshape the economy, and that affects their buying and investing habits.” People now think they have to “take more control themselves” (…..)

  7. vacciniumovatum: I suspect that one of the reasons that Apple and their ilk aren’t letting go of their cash is not just because of tax uncertainty, but because the US is a mature market. Too many (the majority?) of sales are for replacement goods (consumer owns an older version of the product, or a similar one). In a country where a majority of the sales are for new adopters, there’s a better chance to get higher profits as the choice is nothing or this, instead of living with the current or slightly older version or buying the incrementally better new version. Tablet PCs are a new product but even they are more sophisticated offshoots of netbooks and e-readers. I suspect that is one of the reasons that they aren’t selling like hotcakes here (aside from the fact that unless you are a gadget junkie, or don’t have a netbook or e-reader, they just aren’t worth the additional investment). Getting our fiscal house revved up by getting our political situation in order will help get things moving but we Americans need to realize that the future customers for many of these companies is in places like China and India where there are far more consumers who don’t have older versions of their products and want to get what’s out there so they can experience what people in the developed world are used to.

  8. Professor Uziel Nogueira says: I agree entirely with your assessment. The world economy has changed mainly because the way US based transnational corporations operate globally, particularly in the area of IT and electronics. Apple and its $ 130 bi + profits sitting overseas is an excellent example. Emerging markets are becoming rapidly its main source of revenues. Thus, Apple’s profits will be used where investment returns are maximized; bringing the money back to the US is not the case. The US political system has two ways to deal with the question. Either change the rules of the game in which transnational corporations operate or maintain the status quo and see profits following the same path of domestic jobs a.i., moving overseas.

  9. President Obama and the Democrats want more jobs. So do Republicans. Heck, everyone does. Yet, job creation is weak. It’s true that the economy has generated 5.5 million jobs from its low point. Still, there are 3.2 million fewer jobs now than at the previous high. The official unemployment rate is 7.9 percent, but it would be 14.4 percent if it included part-timers who would like full-time work and discouraged workers who have stopped looking, notes Janet Yellen, vice chair of the Federal Reserve Board. Scarce jobs are the nation’s first, second and third most important economic and social problem. What’s especially disheartening and mystifying is that, until now, job creation was considered an inherent strength of the U.S. economy. Despite some years of recession-induced joblessness, unemployment averaged 5.6 percent from 1950 to 2007. The Congressional Budget Office doesn’t expect it to fall below 7.5 percent until 2015. That would make six years above 7.5 percent — the longest stretch of high joblessness in 70 years. It has defied massive budget deficits and ultra-low interest rates. Something’s changed in how the economy works. One theory is “deleveraging”: Americans paying down their high debt. The economy won’t accelerate until this process is complete, the argument goes; the fact that debt-service ratios have dropped to early 1990s levels is considered a good omen. Another approach is to examine the economy by sectors and see which ones are lagging compared with past recoveries. Yellen did this and indicted housing (its deep slump) and state and local governments (spending cuts). Again, there are said to be encouraging signs. Home construction, prices and sales are up; state and local spending is stabilizing. This analysis helps but misses the main story. To overgeneralize slightly:

    We have gone from being an expansive, risk-taking society to a skittish, risk-averse one. Before the 2008-09 financial crisis, the bias was toward more spending. The inclination was to surrender to immediate gratification. Want a new car? Sure, why not? More meals out? Great idea! Businesses behaved similarly. Banks made the next loan; companies hired the next worker and approved the next investment project. An ever-expanding economy justified optimism, and optimism supported an ever-expanding economy. Hello, bubble. The psychology has now reversed. The bias is against extra spending. Eat out? Try leftovers. Remodel the basement? Oh, leave it alone. In the boom years, the personal saving rate (savings as a share of after-tax income) fell from 10.9 percent in 1982 to 1.5 percent in 2005. Now it’s edging up; from 2010 to 2012, it averaged 4.4 percent. It could go higher, imposing a further drag on the economy.

    Businesses have also retreated. They resist approving the next loan, job hire or investment. Since 1959, business investment in factories, offices and equipment has averaged 11 percent of the economy (gross domestic product) and peaked at nearly 13 percent. It’s now a shade over 10 percent, reports economist Nigel Gault of IHS Global Insight (…..)

  10. With a $145 billion cash hoard, Apple could acquire Facebook, Hewlett-Packard and Yahoo. Put another way, it could buy every office building and retail space in New York, according to city estimates.

    But despite its extraordinarily flush balance sheet, the technology behemoth borrowed money on Tuesday for the first time in nearly two decades. In a record-size bond deal, the company raised $17 billion, paying interest rates that hovered near the low-cost debt of the United States Treasury. Apple’s return to the debt markets raises a riddle: Why would a company with so much cash even bother to issue debt? The answer has a lot to do with the frenzied state of the bond markets. Companies are issuing hundreds of billions of dollars in debt to exploit historically low interest rates. They are also feeding strong investor demand for high-quality corporate bonds as an alternative to money market funds and Treasury bills, which are paying virtually nothing. Apple’s maneuver, however, also reflects the unusual challenges of a fabulously successful company with a sinking stock price. Apple is plagued by concerns that its growth may be slowing, and its shares have plummeted from a high last fall of more than $700 to under $400 last month. In an effort to assuage a growing chorus of frustrated investors, the company is issuing bonds to help finance a $100 billion payout to shareholders. Apple said last week that it planned to distribute that amount by the end of 2015 in the form of paying increased dividends and buying back its stock. Since that announcement, Apple shares have risen 10 percent, closing at $442.78 on Tuesday. Taking on debt can actually magnify the returns for shareholders and improve stock performance, financial specialists say. It can reduce the overall cost of the capital that a company invests in its business. In addition, after a stock buyback, there are fewer shares, which can increase their value. Yet even as shareholders and analysts welcome the financial tactics, they emphasize that the maker of iPhones, iPads and Macs must continue to innovate and fend off increasing competition. After all, today’s Apple could be tomorrow’s Palm. “This is a substantial return of cash and it’s the right thing to do on many levels,” said Toni Sacconaghi, an analyst with Bernstein Research. “But, ultimately, the company has to execute. This is no substitute for that.”

    By raising cheap debt for the shareholder payout, Apple also avoids a potentially big tax hit. About two-thirds of Apple’s cash — about $102 billion — sits overseas in lower-tax jurisdictions. If it returned some of that cash to the United States to reward its investors, it could have significant tax consequences for the company. In some ways, the bond issue is a response to that tax situation.

    “They have been so successful with their tax planning that they’ve created a new problem,” said Martin A. Sullivan, chief economist at Tax Analysts, a publisher of tax information. “They’ve got so much money offshore.” The $17 billion debt sale by Apple is the largest corporate issuance on record, surpassing a $16.5 billion deal from the drug maker Roche Holding in 2009, according to Dealogic (…..)

  11. Professor Uziel Nogueira says: Apple’s return to the debt markets raises a riddle: Why would a company with so much cash even bother to issue debt? This rhetorical question by the NYT is not a riddle, really. Apple is a transnational corporation based in a country issuer of a world currency called US dollar. The FED is issuing humongous amounts of dollars that are accepted anywhere where Apple does business. The financial game for big corporations and wealthy individuals 2013 is simple. Borrow money at near zero interest rates in the US and invest overseas with extraordinary returns in fast growing emerging markets, particularly China-Asia. Other triple A corporations enjoy the same privilege and dominant position as Apple. In the post 2009 financial meltdown of Wall Street, transnational corporations are winners big time.

    Here is the bottom line. At the end of Ben Bernanke’s FED cycle of money for nothing and interest rates for free, wealth and income will be even more concentrated in the US. The winners and losers of the 2013 financial game are the same of last decades. Corporations, powerful investors and CEO winners at the top and middle class losers at the bottom of the pyramid.

  12. (…..) But let’s not look too hard under that hood. What’s good for corporate icons has to be good for America, right?


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