Thursday, 22 April 2010

The problem with too much cash

Too much cash. An envious position to be in, but there are a few companies in this predicament. What do you do with all that cash ?

Apple is the best example of a company with a massive cash problem. Yesterday they announced results that blew the market away. But they also have a problem. Cash. Lots of it lying idle. Actually $42bn of it. Earning a princely return of 0.75% per annum. And they are likely to generate another $14bn of it this year.

Microsoft is a long time hoarder of cash. At last count they had some $40bn. Google has $25bn, Intel $19bn. Its not all tech companies in this list. Exxon still has $11 bn after returning $26bn to shareholders last year.

So what do you do if you have this problem ?

You can put it in the bank, as most of these companies have done. And earn virtually nothing on it. A significant proportion of the value you generate for shareholders by running your business, is destroyed by the act of digging a hole in your backyard and burying the cash.

Or you can be tempted to try and earn more on it by starting to take risks in investing it in financial markets. That’s a slippery and dangerous slope, but there isn’t a single corporate treasurer who isn’t tempted to do so.

More dangerous alternatives exist. CEOs with cash piles are sorely tempted to spend it. In a nice headline grabbing acquisition. Show me one CEO who doesn’t like to see his photo in the papers. A mega acquisition is guaranteed to get him just that. The cash that’s burning a hole in the pocket tempts you to go out and do something. Especially as hot shot investment bankers are constantly telling you to do so.

Or you can return the money to shareholders. Either as dividends or as share buy backs. Shareholders sometimes love this, but they tend to forget it the next minute. And somehow giving it away is interpreted by the market that you don’t know what to do with it and therefore your future is not bright – so beat down your share price a notch.

Too much cash also can have a dampening effect on companies sometime. When you are struggling for cash and watching the bank balance every day, you value every cent and hoard it. When you have too much, you get lax. Minus the pressure, corporates do get complacent. They also continue to do strange things. Such cash rich companies still ask for 60 days supplier credit even though the cost of borrowing of their supplier (which is included in the price) is much more than the investment returns they are getting.

So what do you do ?? As in life, so in business – too much of even a good thing can be a problem !


zeno said...

Too much of anything is a problem. so true! cant agree more on tat.

that excess cash can be given to employees as bonus or money to buy the stocks

Rather than acquisitions, you can spend on quest for holy grail[heavy R & D]

we could consolidate all the other ideas that may come morph them in more business jargon and charge a consulatant fee :P

gils said...

our simple and super option iruku. Enaku oru share thara sollunga ellariyum. "Gils nala nidhi" ku contribute panna tax relief..pain relief..ella reliefum kedaikum.

Ramesh said...

@zeno - Great idea to form a consultant pool - McGilsey & Co and lets charge a bomb for our advice :)

@gils - Now how come you made exactly the comment I expected :):) I am now qualified to stand for the post of Secretary of the Gils Rasikar Mandram (Fan Club).

ambulisamma said...

I think u hv personally related to apple's position yourself,and you are doing one post like this.
(Too much of a cash to habdle yourself right?)

@ Gils:' If too much of a cash ocerflows into'Gils nala nidhi' then you will also be into problem,so whatever exceeds 1 million dollar shld go for this thunai nidhi named after Ambuli and managed by me.

Deepa said...

Our Father in heaven. Holy be your name....

Ohh Lord! I am so happy in my life. So happy that I am fed up of this happiness. How about giving me some problems too! Please Lord, make suffer with the woes of having too much money! I know life is all about suffering, I am willing to suffer my lord!

P.S.- This voluntary suffering is only acceptable with regards to excess cash! If you try and play tricks with me, I will make Gils invade your kingdom!

Ramesh said...

@ambulisamma - Ha ha Ha. If only that was true .....

@Deepa - Touche ! May the Good Lord bless you with THE problem !!

gils said...

avvvvvvvv....gils invading kingdoma!! oh gaawd

Durga said...

Well, I have personally known people who have enough cash balance in their banks (corporates) and behave tight fisted to pay the creditors, whereas they latch on to the debtors like a leech at the cost of client relationship! Pathetic working capital management I must say. Generating cash is fine, but how to employ the excess cash is the question. Regulate the working capital a bit more, haggle with the creditors some more and get better deals, to name an option. Guess some people just cannot do away with their
"cash based accounting" mindset. Phew!

Ramesh said...

@Durga - Yeah some companies just like to be a bully all the time !

Sandhya Sriram said...

as one of the person i respect a lot used to say

"Only Cash is Reality"
(you know who)

and anything which is real (and not cooked up like sathyam) is worth it even though it is slightly excess :-)

Now that i am not the business expert, i can only think of all our politicians and businessmen. I many times wonder, how they manage the billions of cash they supposedly possess in various colours - storage, expenditure, transport - no visible paper - complex network of trust and fear... what it takes to run a parallel system of that magnitude....!! phew... companies have a simpler task!!

J said...

At least for now, many tech companies that are sitting on huge piles of cash, are unable to touch their cash because they are holding it overseas and are reluctant to bring it back to the US for fear of paying huge taxes.

Ramesh said...

@Sandhya - Oh Yeah - that problem makes the company's problem seem perfectly trivial by comparison.

@J - True - US Tax laws are particularly onerous. But I think Apple has most of its cash in the US, because most of it is generated there in the first place.

Anonymous said...

Even in the latest quarterly filings Apple says that of the 41 billion cash plus marketable securities, about 24 billion is held in foreign subsidiaries. Granted, that still leaves a substantial portion of cash in the US.

I dont know the specifics of Apple but apparently some tech companies sell their intellectual property to a foreign subsidiary and the the US firm will pay them royalties. So even if most of the business is done in the US, they can keep the cash overseas. I dont have specific information to back this but just some conjectures in the popular press. Still it is fascinating to think about how and why these companies stockpile cash.

J said...

oops I didnt realize that my last comment came out as anonymous...

Ramesh said...

@J - Oh right; I did not realise that much of Apple's cash was also outside. I suppose this is one reason why those companies do not dividend out their cash - to do so, you have to being them into the US and then trigger a tax liability.

Vishal said...

Yeah, too much of anything is a problem. Oh with cash, of course. And too much of lack of cash is also a problem. ;-)

I pray too much of prosperity and growth for the "mango people" and see too much of grand blessings for you and all commentors over here!!! :-)

Ramesh said...

@Vishal - May the blessings be for you too !

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