Editorial: Cash-rich kings
Posted on 09 May, 2015 by James Mawson, editor-in-chief
Governments to find ways to free up cash flow could also be helpful.
Rating agency Moody’s said in its report (link) 1,137 US non-financial companies held $1.73 trillion of cash as of year-end 2014, up 4% from $1.67 trillion at the end of 2013, and this could encourage them to do more corporate venturing.
But the location of these potential deals could be outside the US given the unintended consequences of tax policies.
Overseas cash was estimated by Moody’s at $1.1 trillion, or 64% of total cash, up from its estimate of $950bn, or 57% of total cash last year, as this amount “reflects the negative tax consequences of permanently repatriating funds to the US and the use of domestic cash for dividends, share buybacks and the majority of acquisitions”.
Capital spending of $937bn, dividends of $394bn and net share buybacks totaling $289bn in 2014 were all record highs, while acquisition spending increased 20%, to $322bn. Given overseas cash was difficult to repatriate to the US for tax reasons, to support this spending and to supplement internally generated cash, American non-financial companies issued $320bn of debt (net of repayments) in 2014, versus $359bn in 2013.
With $1.55 trillion of debt maturities, non-financial corporate cash balances now cover 112% of aggregate debt maturities over the next five years, although as the majority of this money is overseas the net figure after accounting for tax would reduce this debt coverage ratio.
As one private equity veteran and trained accountant said: "The report seems to draw comfort from the fact that cash coverage ratios are improving. But if the tax is offshore and you can't get hold of it then it is not such a rosy picture.
"The other issue is that the companies with the cash - mostly tech and healthcare - are presumably not the ones with the debt. So it is too simplistic to add up all the cash and all the debt and then compare the two numbers. They should be looking at which companies hold the debt. If company A has $1bn of debt then it's not much help to them if Apple is sitting on billions in cash!"
The top 50 holders of cash today account for $1.08 trillion, up 4% from $1.04 trillion in 2013 and 22% from $889bn in 2012.
Richard Lane, senior vice-president at Moody’s, said: “All of the top tech firms (Microsoft, Google, Cisco, Qualcomm, Intel) have had some portion of their cash committed to venture/seed investing for years, with the intent to spur innovation and market expansion of their respective market adjacencies or technology development to advance/enhance existing markets, such as advancing touch screen capabilities, visual computing, software defined networking [and] mobile communications.
“Growing cash balances could encourage more of this. However, [corporate venturing] has to compete with other calls on cash, such as dividends, share buybacks, acquisitions and overall liquidity/risk management needs.”
Analysis by sister paper Global Corporate Venturing (GCV) in its World of Corporate Venturing annual report for last year showed nearly half of the top 20% of companies in the Fortune 500 ranking had corporate venturing unit.
But the proportion jumps to nearly 90% when analysing Moody’s list of the top 50 (link) by cash reserves, although a number of groups, such as electronics group Apple, social network Facebook and car maker Ford, effectively outsource their units through Kleiner Perkins Caufield & Byers set up specific funds to develop the ecosystem around the iPhone, chief executive Mark Zuckerberg’s wealth manager, Iconiq Capital and Ford chairman Bill Ford’s VC firm Fontinalis Partners.
When GCV analysed the firms outside of the top 100 in the Fortune 500 it found the proportion of corporations with a venturing operation fell to 17% overall.
Governments, such as Russia, have tried to encourage corporate venturing through mandating a percentage of research and development expenditure be used on supporting entrepreneurs. But finding a way to free up cash flow could also be helpful.
See more from this Government Report: US
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