The poet Jim Harrison once observed, "Modest dangers make you attentive, while extreme danger can explode your equilibrium, sometimes permanently." One illustration of this tendency, according to Chris Mayer, editor of Capital & Crisis, is the growing pile of cash on corporate balance sheets.
The credit crisis seems to have exploded the traditional equilibrium between cash and debt. Of course, this "equilibrium" was no such thing, as corporate cash levels have been perilously low for years…at least in the finance sector.
But corporate chieftains are becoming attentive to danger, at least for now.
"The credit crisis seems to have put fear back in their spines," Chris remarks. "The 500 largest US companies – excluding financial firms – hold the largest cash hoard as a percentage of assets since 1960. The Wall Street Journal reports today that cash hoard is nearly $1 trillion, or about 10% of total assets. That was in the second quarter, for which we have full numbers. So far in the third quarter – with 248 of the 500 firms reporting – cash has increased to 11.1% of assets.
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"Cash is the financial equivalent of a big, soft pillow," Chris continues. "It helps you sleep better at night. After the credit crisis turned small balance sheet leaks into lethal holes, executive suites around the country seem determined not to let that happen again. The Wall Street Journal highlights the case of Alcoa, the big aluminum producer. It sits on $1.1 billion in cash, up 28% from a year earlier. It cut its dividend, even though it is making money. The CFO said, "We’re just going to be extremely prudent."
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"But there might be another reason why the bigwigs sit on all that cash," Chris reasons. "They might just not see many good opportunities to invest in right now. In other words, the piling up of cash in America’s corporate treasuries may just mirror the weak economy."
But Chris suspects these corporations won’t pile up cash forever. Eventually, they will start itching to launch takeover deals. In fact, Chris points out, "We are already seeing a pickup in takeovers and mergers. Just last week, CF Industries, the fertilizer company, upped its bid for rival Terra Industries. The new offer is worth $200 million more and is mostly cash. Also last week, Denbury Resources offered $50 per share for Encore Acquisition – about $15 in cash and the rest in stock."
So even though the overall market seems richly priced at current levels, Chris has been setting his sights on a handful of names that look to him like ideal takeover candidates. T3 Energy Services is one of his favorites. He believes this leading oilfield services company would make a good fit with the likes of National Oilwell Varco or Cameron Intl.
Tesco would be another juicy target, Chris believes. The stock trades slightly below book value, only 11 times earnings, and also has a clean balance sheet.
November 5, 2009
Eric J. Fry has been a specialist in international equities since the early 1980s. He was a professional portfolio manager for more than 10 years, specializing in international investment strategies and short-selling. Mr. Fry launched the sometimes abrasive, mostly entertaining and always insightful Rude Awakening. His views and investment insights have appeared in numerous publications including Time, Barron's, Wall Street Journal, International Herald Tribune, Business Week, USA Today, Los Angeles Times, San Francisco Chronicle and Money. He appears regularly on business news stations like CNBC and Fox.
