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An Old Fashioned View of Hoarding

My Financial Times Column 08/30/10

An old-fashioned view of hoarding

By Philip Delves Broughton

Until the credit crunch struck, companies that hoarded cash were viewed as thoroughly idle. They were the indecisive weaklings who should have been out acquiring, investing, returning money to investors and loading up the balance sheet with debt. Cash hoarders spoke of peace of mind and strategic flexibility, while the chest-beaters said only debt could force a manager to make tough decisions.

Two years of a recession and we are back to a more old-fashioned view of cash, one which should be of great relief to managers. Holding cash is once again seen as a virtue rather than a vice, and rightly so.

Rocco Landesman, the Broadway producer now running the National Endowment for the Arts, once said that the key to life is having a sense of possibility, and that the best way to achieve that is to carry no less than $10,000 in cash with you at all times. Cash gets you deals, enables you to act quickly and helps you sleep at night.

Steve Jobs, chief executive of Apple, has taken the Landesman Theory to extremes, keeping some $46bn on hand. Shareholders may bleat for a dividend and analysts say too much cash makes a company sloppy. But there is no way Apple will be flirting with bankruptcy any time soon, as it was in 1997 when Mr Jobs returned to the business he founded. And if it does ever decide to make a big, cash-intensive move, it will do so without breaking sweat. Apple’s cash means it can enter a new sector or transform an industry faster than an investment banker can say “roadshow”.

Not everyone has Apple’s discipline. Cash often burns a hole in the pockets of executives. There you are twiddling your thumbs in your office, you’ve just read Peter Drucker on the need for managers to have a “bias for action”, and the CFO tells you there’s a few billion earning money-market returns. It’s like giving a teenager a credit card and saying use it just for emergencies. In many cases, it’s too much to ask.

In the late 1990s, Edgar Bronfman Jr famously cashed in part of his family’s hard-won Seagram fortune and lost much of it buying entertainment companies. Intel’s recent acquisition of McAfee and BHP Billiton’s bid for PotashCorp have both attracted criticism that they are two cash-rich companies spending for spending’s sake, with not enough regard for value.

But none of these cases fatally skewers the case for cash. They merely warn that cash requires mental toughness and is no excuse for ignoring value.

Non-financial corporations in the US are now reckoned to be sitting on some $1,800bn in cash, up by a quarter since the recession started. For politicians concerned by stubbornly high unemployment, this seems maddening. Why aren’t these businesses hiring? To managers, the answer must be obvious. They are hoarding the cash to make sure that with all this uncertainty, they can keep their businesses intact. They have turned from debt-fuelled buccaneers to Scottish widows.

This hasn’t always been the dominant view. In early 2008, Orit Gadiesh, chairman of Bain & Co, the consultants, co-wrote a book called Lessons From Private Equity Any Company Can Use. There were six lessons, the fifth of which was “make equity sweat”. Ms Gadiesh, who was expressing a then prevailing view, exhorted the managers of companies large and small to “get comfortable with leverage”, because “scarce cash compels managers to manage working capital aggressively, discipline capital expenditures, and work the balance sheet hard”.

Two years of dismal markets and constrained credit and balance sheet jockeying now looks like a bull-market luxury. It is the companies with cash that are now envied and admired. A friend who built a successful start-up once told me that his happiest days were those when he had money in the bank. It is this psychological value that all the fee-driven bankers and consultants underestimate as they try to separate companies and managers from their cash. Bill Gates once said that the reason he kept so much cash on Microsoft’s balance sheet was because he never wanted to let down all the friends he had hired.

You can talk about moral hazard, the opportunity cost of holding cash, the importance of dividends, buy-backs and the discipline of debt. But all these arguments suggest cash is a bad thing, when in fact it may be just what you want to keep your team focused and optimistic.

Managers with cash can think about doing interesting, profitable things in the future. It means they can hire great people, who can work to their utmost, free of the depressing threat of default.

 

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