Big companies are hoarding cash

Jeremy Hobson Dec 21, 2009

Big companies are hoarding cash

Jeremy Hobson Dec 21, 2009


Bob Moon: “Alcoa can’t wait” to partner with a Saudi Arabian mining company on a big joint venture. The big American aluminum producer put a shiny bow on that $11 billion deal and wrapped it up today, which might not seem all that unusual in, shall we say, better times. But you might recall that just last week Exxon put up $30 billion to buy XTO Energy.

How can these companies do all this buying in the midst of the Great Recession? Here’s a hint: It ain’t gift cards. It turns out they’ve got a lot of cash on hand. In fact, as Marketplace’s Jeremy Hobson reports from New York, cash reserves at the biggest firms in the country are at their highest levels in 40 years.

JEREMY HOBSON: When Google starts spending again, the search for dollars won’t take a tenth of a second.
And it’ll yield about 22 billion results.

On a recent conference call, CEO Eric Schmidt told investors the company’s got plenty of cash in its wallet.

ERIC SCHMIDT: We hope that that will continue for a very long time. We love cash.

Alcoa loves it, too. The aluminum giant’s holding 28 percent more cash than it was last year.

Here’s spokesman Kevin Lowery.

KEVIN LOWERY: It’s being conservative, and it seems to be the prudent thing, so when the economy around the world begins to improve, then we’ll be in a much better and stronger position moving forward.

Now, Google and Alcoa are two well-known firms. But Howard Silverblatt, a senior index analyst at Standard and Poors, says they’ve got plenty of company. Just look at the quarterly reports, he says, and you’ll see that businesses large and small are hoarding cash.

HOWARD SILVERBLATT: Over the last several years, companies have become stingy on what they’re spending, but what we’ve seen in the last six to seven months is companies really holding onto their money.

How much are they holding? On average, nearly 10 percent of their value.

SILVERBLATT: We go back with the S&P indexes for decades and there’s been nothing like this, especially in health care and technology. Those sectors hold basically over a fifth of their market value in cash.

The money is stored in bank accounts — getting very little interest. Or in low-risk Treasury bills. Think of it as a rainy day fund for companies that are still nervous about the economy.

Or they just can’t find anything to spend the money on, according to Christopher Mayer. He’s editor of Agora Financial’s Capital and Crisis newsletter.

CHRISTOPHER MAYER: The opportunities aren’t there to invest the money as in years past.

HOBSON: So it’s not just that you want to save, it’s that there’s nothing to buy.

MAYER: It’s that there’s nothing to buy and it’s across sectors, so it’s really throughout all sectors of the economy.

But stuffing cash away in a vault somewhere is no way to grow a business.

Even Scrooge McDuck claimed the gold in his vault was constantly on the move.

SCROOGE MCDUCK: If I sat on my money, I might just as well be stranded on a desert island, for all the good t’would do me. I couldn’t eat it, couldn’t wear it, couldn’t use it, ooh! I can’t bear it!

Christopher Mayer says most companies won’t be able to bear it much longer either. He’s bracing for a boom in mergers and acquisitions — the inevitable result of such a large cash build-up.

Howard Silverblatt says it may have already begun.

SILVERBLATT: Companies are picking at other companies, which are still depressed, and their stock price is somewhat lower, and they’re trying to buy them to consolidate and get a bargain.

For now though, the fear factor is trumping bargain hunting. And Christopher Mayer says these giant cash hoards can tell us a lot more about the state of the economy than the climbing stock market.

MAYER: What you see on the ground from the companies is that the economy has not yet recovered, and that we are still looking at a period here where things are going to still be pretty weak.

Consider this, he says: Even with big cash reserves, many companies continue to lay off workers.

In New York, I’m Jeremy Hobson for Marketplace.

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