The Growing Pile of Cash On Corporate Balance Sheets

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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.

"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."

"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.

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