Why are the most successful companies on the planet acting like misers in a Balzac novel?
All across the world companies have in recent years been hoarding cash, nowhere more so than in the US. For at least a decade and a half, cash has progressively increased its share of the American corporate balance sheet, to the point where US quoted companies have turned into the Scrooges of the global economy. According to research by Juan Sánchez and Emircan Yurdagul of the Federal Reserve Bank of St Louis, their cash hoard had reached almost $5tn by the end of 2011.
Such is the scale of this cash pile that the US corporate sector must have been partly responsible for the surge in demand for safe assets and the decline in interest rates that fuelled the US housing bubble. Yet American business has been spared the opprobrium heaped on excess savers such as China, whose official reserves top $3.5tn. There is nonetheless something fundamentally different about the US corporate cash pile compared with those of, say, China and Japan, where burgeoning corporate sector savings have increasingly fuelled global imbalances.
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John Plender
Corporate savings consist of depreciation and retained earnings. For much of the past 20 years the Chinese government has urged state-owned companies not to distribute profits, which would help push up retentions. In the absence of developed financial markets, companies are more reliant, too, on internal financing. For its part, Japan is a mature economy in which investment opportunities are insufficient to absorb the country’s domestic savings.
In contrast, corporate miserliness in the US is driven by the technology sector. I calculate that the combined cash and liquid investments of Apple, Microsoft, Google, Cisco, Oracle, Qualcomm and Facebook now top $340bn, a near-fivefold increase since the start of the millennium. What differentiates these tech companies from most of the other businesses that contributed to the American corporate cash nest egg is that they have little or no borrowings. In the case of Apple, the build-up of liquidity from $24.5bn five years ago to $129.8bn today would have done credit to the Sorcerer’s Apprentice.
This extraordinary penchant for saving has been antisocial in the aftermath of the financial crisis, when the world was suffering from deficient demand. With many billions of corporate dollars pouring exclusively into money market funds and bonds, the existing fiscal and regulatory bias against equity investment in the US will be given a new twist. Such behaviour also leaves us with a paradox. Why are the most successful and innovative companies on the planet acting like misers in a Balzac novel during a dramatic technological revolution that is leading to the digitisation of virtually everything? How can there be inadequate investment opportunities to absorb all this money, much of which earns a negative real return?
In fact we have been here before. In the 1930s John Maynard Keynes worried that the economy was hostage to the volatile instincts of businessmen. Money’s function as a store of value appeared problematic to him because it allowed entrepreneurs to retreat from investing when confronting uncertainty. And he railed at the capitalist system’s reliance on “the love of money” as he put it, to drive economic growth.
Today it is not individual entrepreneurs who are gloating over their cash. It is more a kind of corporate narcissism. Yet fear and uncertainty have undoubtedly played a part in causing a conspicuous acceleration in saving since the financial crisis. And in a fast-moving globalised market the flexibility that cash affords in the ultra-competitive technology sector matters.
The precautionary motive is not the only spur to cash consciousness. Corporate governance may be a factor. Apple, Microsoft and Google are immune from the discipline of hostile takeover. Many technology companies have a two-tier voting structure that allows founding entrepreneurs to enjoy voting control with a minority of the capital, so they are under little pressure to raise payouts – although the shareholder activist Carl Icahn hopes to squeeze more out of Apple, where he recently bought a stake.
Some argue that because a majority of the cash is held outside the US, taxation is at the root of it. Certainly, tough US tax rules on bringing money home provides an explanation of why cash is not repatriated, but surely not why it goes uninvested. The world’s investment opportunities are not, after all, confined to the US.
The most plausible reason for this corporate thriftiness is surely that information technology, social networks and the rest are driven by human, not financial, capital. Those such as Google or LinkedIn are the very opposite of capital-intensive and the parts of the industrial process that are capital-intensive at Apple or Microsoft are substantially outsourced. This chimes with the fact that the biggest cash hoarders are large research and development spenders.
Such companies resort to the equity market chiefly to provide an exit for venture capitalists or to acquire a currency for takeovers. And they can reasonably argue that it is inappropriate for the owners of financial capital, which is especially abundant in a world of excess savings, to have all the control rights in the corporation when human capital drives growth.
With recovery, the precautionary motive is set to wane, but in this brave new world America’s technology wizards will still be condemned to spew out cash that they cannot absorb in business investment. It is a novel quirk in the workings of late capitalism.
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