   Corporations are sitting on piles of cash
Corporations are sitting on piles of cashQuote:NEW YORK -- Imagine the dilemma of having so much cash in your bank account that you didn't know what to do with it.This is of course a pipe dream for the average American, but is now reality for the country's biggest corporations. The industrial companies that make up the Standard & Poor's 500 index -- which excludes financial, transportation and utility companies -- have a staggering $643 billion in cash and equivalents.Wall Street analysts remain unsure how companies will spend this record hoard. Even an unprecedented $500 billion in stock buybacks over the past six quarters has failed to stop companies from building lofty amounts of cash on hand."We're in a time that is out of whack with all historical numbers," said Howard Silverblatt, equity market analyst at Standard & Poor's. ...The best example of how these stockpiles are helping companies boost profits might be Comverse Technology, whose $2.33 billion in cash represents 53 percent of its market valuation. In 2005, the voice-messaging software company reported a profit of $57.3 million -- and the amount of interest income was $38.9 million, according to S&P.But leading the pack with the most cash is Exxon Mobil Corp., which has about $36.55 billion on its balance sheet. That amount is nearly equal to its 2005 profit of $36.13 billion, the highest ever for a U.S. company....Beyond stock buybacks, very few companies have done much with their stockpiles. The most talked about was Microsoft Corp.'s decision to pay out a record $32 billion special dividend to shareholders in 2004 -- though relatively few companies have followed suit.Others have taken a more unusual approach, such as Apple Computer Co.'s decision to set up a Nevada-based asset management firm to handle its cash and short-term investments. Apple now has about $6.34 billion to play with, still below the $9.06 billion held by PC maker Dell Inc., according to S&P.One of the biggest avenues in which companies have spent this excess money has been through mergers and acquisitions.Some 75.4 percent of all deals under $1 billion so far this year were done purely with cash, said Baird analyst Steven Bernard. There has been $122 billion worth of deals done under $1 billion, up from $101 billion during the same period last year....Ok. So, we could hash out how this came to be and how wrong it is or what have you, but I think it would be more constructive to discuss how this money should be spent. That is, how would you spend that money if you were in control of it? Would you buy back stock? Would you continue sitting on it passively letting interest rates grow it larger? Would you pay it out in dividends? Would you give your employees a raise? Would you use it to buy existing companies? Would you use it to launch new companies? Would you use it to invest overseas? Would you use it to set your company up as a bank? Would you become a philanthropist? Would you do something else with it? Would you do all of these things or just some of them? Would you do a little or a lot? What would you do and why would you do it?    
  I'd embezzel it all and buy an island.   ;  Can you say army of killer robots ?More serriously, I would just let it sit there.  Or put it in the hands of someone else.  At that point where every fantasy I could ever care about would quickly become reality, I'd just stop, content in knowing that my descendance would live well for centuries to come and I'd simply enjoy myself without thinking about work, ever.   ;  I would probably setup several small R&D divisions that specialize in areas that interest me.   ;  The article's a little vague. Are they literally sitting on piles of cash, as in, there is a vault somewhere in HQ piled high with ten-thousand-dollar bills? Or is that money credited to a savings account, and being loaned out by the bank?   ;  I'd start my own space program.   ;Quote:Original post by WitchcravenI would probably setup several small R&D divisions that specialize in areas that interest me.Also R&D in areas that would contribute to the well-being of humanity.  To be cliche', stuff like an end to world hunger.  Probably not specifically that, but...anyway.I think a lot of it should also go into dividends, and a large raise for employees in the bottom tiers since they are a big part of where this profit came from and most of the upper tier workers already have enough to live very comfortable lives.  What can I say, I'm a communist.   ;Quote:Original post by LessBreadOk. So, we could hash out how this came to be and how wrong it is or what have you, but I think it would be more constructive to discuss how this money should be spent. That is, how would you spend that money if you were in control of it? Would you buy back stock? Would you continue sitting on it passively letting interest rates grow it larger? Would you pay it out in dividends? Would you give your employees a raise? Would you use it to buy existing companies? Would you use it to launch new companies? Would you use it to invest overseas? Would you use it to set your company up as a bank? Would you become a philanthropist? Would you do something else with it? Would you do all of these things or just some of them? Would you do a little or a lot? What would you do and why would you do it?I won't get into how money should be spent, since that's a decision best suited for the shareholders and the company's board of directors. Instead, I'll talk about why it shouldn't not be spent.In short, sitting on a pile of cash for an extended period of time is one of the worst possible moves a corpoation can make, economically speaking. When a firm has a large amount of liquid cash and they haven't done anything with it, it means one of four things:they don't know what to do with it (no new projects to invest in, or no acceptable risks to take, or just managerial incompetence; all bad news); orthey foresee an economic downturn in the company and they're saving up to weather the bad times ahead (good foresight, but bad news); orthe best investment available to the company is the federal funds rate, currently about 5% (very bad news for the company and the economy as a whole, strongly indicative of extended recession and huge deflation);the company is preparing to buy out another company (bad news for the target company, good news for the acquiring company)In all four of these cases, something bad happens to at least one party. Holding a large amount of cash is not generally good.Corporations keeping cash is functionally equivalent to individuals hoarding money under a mattress. It's not a terrible place to put your money -- there's no risk involved, except inflation -- but it doesn't have anywhere near the earning potential as if you'd invested in, say, bonds or stocks.Furthermore, if a company has a large amount of liquid assets, this may make them an easy target for takeovers. Liquid assets have real, tangible value whose worth is objectively measureable. Less liquid assets are not so easily measured -- for instance, it's hard for someone outside Ford to say how much Ford's various engine patents are worth in the long run. Someone who wanted to acquire Ford would have to assess this accurately in calculating their takeover offer: too low, and the board will scoff; too high, and you've overpaid for something that was worth a lot less. But with liquid assets, the value is exact: $10 million in the bank is worth exactly $10 million.It also tends to send the signal that management is lazy and not necessarily taking the best interests of the shareholders to heart. Otherwise, it can be argued, they would be investing in new research, pursuing new projects and products, acquiring smaller companies that might be useful, etc. This requires a more careful assessment, since there are legitimate reasons for holding cash stockpiles; for instance, if you plan on making a dividends payday sometime soon.In all cases, though, keeping the money lying around and not doing anything with it is bad for the business, bad for shareholders, and ultimately bad for the economy. Investment is what drives the future, not stagnation.[Edited by - kSquared on May 27, 2006 5:25:52 PM];Quote:Original post by SneftelThe article's a little vague. Are they literally sitting on piles of cash, as in, there is a vault somewhere in HQ piled high with ten-thousand-dollar bills? Or is that money credited to a savings account, and being loaned out by the bank?Don't get too hung up on the headline. If that article didn't answer your questions, maybe this one will: ANALYSIS-As rates rise, cash stockpiles may boost profitsQuote:NEW YORK, May 26 (Reuters) - Bulging cash reserves at U.S. companies and higher interest income from rising rates are likely to boost corporate profits this year, but they could cloud the picture of actual earnings growth for investors.Corporate piggy banks, including those at Goldman Sachs Group Inc.(GS.N: Quote, Profile, Research), Exxon Mobil Corp. (XOM.N: Quote, Profile, Research), and Microsoft Corp. (MSFT.O: Quote, Profile, Research), are holding record levels of cash. Some of that cash, in turn, has been put to work -- helping to increase the popularity of stock buybacks, mergers and acquisitions this year.But if the Federal Reserve keeps lifting interest rates, these cash reserves also are set to give a big lift to corporate profits."Cash levels are going to remain high, and companies are getting a bigger bang for their buck," said Howard Silverblatt, senior index analyst at Standard & Poor's in New York. "Interest rates are going up -- slowly -- but they are going up and it adds significant value."Interest income from cash stockpiles increased 38 percent in 2005 and is likely to rise by another 64 percent in 2006, Silverblatt said in a note to clients this week. That increase would make it possible for many U.S. companies to sustain double-digit growth rates in earnings, adding to a three-year string, Silverblatt said. ...;Quote:Original post by kSquaredQuote:Original post by LessBreadOk. So, we could hash out how this came to be and how wrong it is or what have you, but I think it would be more constructive to discuss how this money should be spent. That is, how would you spend that money if you were in control of it? Would you buy back stock? Would you continue sitting on it passively letting interest rates grow it larger? Would you pay it out in dividends? Would you give your employees a raise? Would you use it to buy existing companies? Would you use it to launch new companies? Would you use it to invest overseas? Would you use it to set your company up as a bank? Would you become a philanthropist? Would you do something else with it? Would you do all of these things or just some of them? Would you do a little or a lot? What would you do and why would you do it?I won't get into how money should be spent, since that's a decision best suited for the shareholders and the company's board of directors. Instead, I'll talk about why it shouldn't not be spent.Thanks for supporting the underlying premise of my question. Avoiding a double negative is easy as the two nots cancel each other out: why it should be spent. I am disappointed, however, that you won't offer suggestions for how the money should be spent.  