It's not every day that the top two lead articles of The Wall Street Journal are about spend. But that was precisely the case this morning. It would appear that many U.S. corporate coffers are overflowing for the first time in this "tortoise paced" recovery, presenting chief executives with a challenge that's a bit like poker: Spend, grow and stimulate the economy, or hold as a hedge against further turmoil. My bet's on doing both.
The Journal reports that "At the end of March, nonfinancial companies in the U.S. were sitting on $1.84 trillion in cash and other liquid assets, up 26% from a year earlier, the Federal Reserve reported. In May, 43% of U.S. corporations had larger U.S. cash and short-term investments than six months earlier, according to a survey of 337 senior finance and treasury executives by the Association for Financial Professionals." A chief executive of a Dutch publishing company, who is sitting on about $530 million more than last year, is quoted saying "she is hoping to use some of that money for acquisitions. Last year, business owners were reluctant to consider selling their businesses because they feared they wouldn't get good prices ... She expects the improved economy this year will make them more willing to sell."
M&A investments appear to be top of mind among many CEOs interviewed. "Companies globally announced $1.2 trillion of deals in the first half of 2010, of which 66% by value were all cash, according to data provider Dealogic. That compares with $1.1 trillion in deals a year earlier, of which 54% were all cash." And while a lighting manufacturer with "$367 million [more than] a year earlier ... will spend more than $250 million on factories, equipment and expansion efforts ... [they are also] scouting for companies that create the technology for LED components." The CFO says "he prefers using the company's own cash for acquisitions, rather than being beholden to any banks for financing, partly because he is wary of banks' fees and approval bureaucracies."
Other execs take a more cautious position similar to the CFO of OfficeMax who said "In the event that there was another downturn we wanted to be sure we had adequate liquidity to cover ourselves..." Perhaps it's more like a crap shoot. But since spend truly does matter, let's hope that a significant portion of this cash gets spent on expansion related hiring.