Treasury & Cash Management: GLOBAL FINANCE CASH 25

WHAT’S UP WITH CORPORATE CASH?

Among various explanations for corporations’ letting cash build up on their balance sheets, the most compelling one is that economic growth is still slow. But some companies are not waiting for growth to pick up in order to spend more aggressively.

Cash continues to build on corporate balance sheets because of, and perhaps also despite, the anemic global economy. This paradoxical possibility stems from market conditions that generate positive corporate cash flow without inspiring companies to spend with any urgency. In fact, the Global Finance Cash 25—the 25 public companies worldwide with the most cash, cash equivalents and short-term investments on their balance sheets—saw those figures rise by 7.9% in their most recent fiscal year, according to data compiled for Global Finance by research firm Bureau van Dijk.

Not every cash-rich company got even richer in their latest reporting year. Exxon Mobil, for instance, fell off the list of 25 companies with the most cash and equivalents (before including short-term investments, which are defined as those maturing in three months to a year) after a $3.1 billion, or 10.6%, increase in capital spending in 2012, which reduced its cash and equivalents to $9.6 billion from $12.7 billion in 2011. Exxon also paid down its debt by $3 billion.

And a few other companies on the list of the 25 with the biggest totals of cash, equivalents and short-term investments—including Ford, General Electric, Johnson & Johnson, Mitsubishi, Sony and Toyota—also saw declines in their most recent year (the most recent reporting year is 2011 for Japanese companies, as they haven’t reported their 2012 results yet).

But those companies are exceptions to the general rule as well as to trends in their industries. In the US, cash still exceeds normal levels by about 30%, according to a recent study by the Georgia Institute of Technology, which found that cash, cash equivalents and short-term investments currently equal 13% of revenues. While that’s down from 16% at the height of the financial crisis, it’s still three full percentage points above the 10% level before the crisis. Cash for the 25 global companies with the most as of the recent fiscal year averaged more than 27% of revenues, and that includes non-US companies that usually tend to hold less cash than do US ones.

In contrast to Ford, the cash positions of non-US automakers Daimler and Renault, also on the list of the 25 global companies with the most cash, equivalents and short-term securities, increased by $5.7 billion and $3.2 billion, respectively, in 2012. For its part, Ford boosted its capital spending by roughly 25% last year, to $5.5 billion from $4.3 billion, helping drain $1.5 billion of the cash on its balance sheet in 2012.

Similarly, cash at three pharmaceutical giants among the top 25—Amgen, Merck and Pfizer—also advanced, while Johnson & Johnson’s cash declined, primarily as a result of a $10.5 billion stock repurchase.

Even J&J’s decline in cash reflects caution about growth prospects. A spokesman for J&J noted that returning cash to shareholders is a distant third among the company’s three priorities for capital allocation, after M&A and reinvestment in the business. Capital investment by J&J last year was flat, while R&D inched up from $7.5 billion in 2011 to $7.7 billion in 2012.

TECHNOLOGY CASH PILES GROW

Within the tech sector—another industry that dominates the list of companies with the most cash on their balance sheets—Apple, Cisco, Intel, Microsoft, Oracle and Samsung all experienced significant increases in cash, equivalents and short-term investments during their most recent year. Notably, Apple also has $92.1 billion invested in long-term instruments such as corporate equities and bonds and Treasuries maturing in more than one year. That’s more than three times as much as Apple holds in cash, equivalents and short-term securities, and over $16.5 billion more than any other company. The inclusion of long-term securities in calculating cash accounts for the $130 billion to $150 billion (depending on the source) that Apple is often cited in the press as having in “liquid assets” (see table: Top 10 Global Companies By Long-Term Marketable Securities, page 2).

Not that technology companies are just sitting on their cash. Intel, for example, has dramatically increased both capital spending and research and development during the past two years. This tack is in keeping with the company’s belief that “you invest through a recession” so as to emerge in a stronger position—a stance held by the company since it was first pronounced by its founder Gordon Moore, and reiterated in an interview with Global Finance by Intel vice president and treasurer Ravi Jacob.

The practical application of this stance is borne out by the fact that Intel’s capital expenditures (“capex”) in 2012 of $11 billion had risen to twice its 2008 level. Despite the increased spending, Intel’s cash increased by $3.4 billion in 2012, to $18.2 billion from $14.8 billion in 2011.

Although Exxon also increased capex and repaid debt—and saw its cash on balance sheet decline—other energy companies among the top 25, such as Chevron, Royal Dutch Shell, Petronas and Total, all saw their cash move in the opposite direction.

Among industrial conglomerates on the list with big finance subsidiaries, which naturally require a lot of cash, GE is an interesting exception to the trend. Though the company topped the list with $77.4 billion in cash, that total was down by more than $7 billion from 2011, or more than 9%, as the company has sought to shrink its finance subsidiary in relation to its industrial business. Sure enough, GE’s capital spending increased by almost $2.5 billion last year, or almost 20%, while total assets declined by 5%.

There are several theories as to why cash at other companies continues to increase. In the case of the US multinationals, some experts cite their aversion to domestic taxation at rates as high as 35%, if and when they bring the money home from foreign subsidiaries, and so, the thinking goes, they keep cash earned abroad stashed in banks but squarely on their balance sheets. That, in fact, may be one reason why US companies generally hold more cash than companies based elsewhere.

Other experts say global firms are holding big cash reserves to help make acquisitions, so as to build market share or scale. Regardless of the rationale for M&A, shareholders can be expected to demand at least some of these companies’ cash back sooner or later in the form of dividends or stock repurchases if acquisitions do not materialize or create much value.

Still other experts say the reason many companies aren’t reinvesting the money, either through M&A, capital spending or research and development, but remain reluctant to return it to shareholders is that they simply don’t want to admit they lack sufficient growth prospects to justify spending the money—in effect, signaling to investors that they’re no longer growth companies. And still others say companies holding significant amounts of cash are exhibiting caution in light of weak demand for their products and services.

WAITING FOR A GREEN LIGHT

David McLean, a professor of finance at the University of Alberta, contends that the latter explanation makes the most sense, since the only condition behind such rationales that is different than it was before the onset of the financial crisis is a shortfall in demand. “It’s the only thing that has changed,” McLean observes.

But even some observers who agree that companies are sitting on cash for precautionary reasons say macroeconomic conditions aren’t primarily responsible.

A paper recently published by the highly regarded Ohio State University finance professor René Stulz and two colleagues argues that companies hold more cash than necessary to fund their operations primarily because they increasingly believe their competitive advantage lies in intangible assets, which are most often the product of research and development. And using internal cash to fund R&D is cheaper than using outside funding. The academics’ reasoning: External financing is more expensive for R&D than it is for capital spending, because R&D, although more valuable, is more risky. “A detailed analysis shows that the increase in cash holdings of multinational firms is intrinsically linked to their R&D intensity,” Stulz and his co-authors wrote.

That view seconds one voiced in the November 2003 issue of the Harvard Business Review by Richard Passov, then-treasurer of Pfizer. He and his fellow researchers concluded that the decision to run large cash balances was “one of the key factors in sustaining the value of their intangible assets—which typically comprise a substantial portion of overall valuations.”

Interestingly, the era in which Passov wrote his article closely followed one in which many companies favored the use of debt, over cash, to finance acquisitions and investment—only to see a major backlash against leverage in the wake of the collapse of Enron and other heavily indebted companies. Almost 10 years later, corporate finance circles have yet to witness a comeback of the “cash is trash” mentality.

With $33 billion in cash on its balance sheet in 2012, Pfizer now ranks sixth in cash holdings among the top 25 global companies. But it ranks first in fixed assets to capital spending, showing that its focus is on research and development instead.

Intel’s Jacob lends further support to the idea that big R&D requirements dictate lots of cash. He points out that Intel learned that the hard way back in the early 1980s, when a lack of cash and high potential outside financing costs for research and development led it to turn to its biggest customer, IBM, for an infusion of equity to help fund innovation. IBM later sold its Intel shares at a profit, but Jacob says Intel doesn’t want to put even a sliver of its destiny in a customer’s hands again, however much their interests may align.

Still, some observers contend the theory that outside R&D financing costs militate toward keeping more cash on the balance sheet holds little water in the prevailing environment. Charles Mulford, an accounting professor at the Georgia Institute of Technology, says he doubts that companies are much concerned about financing costs at present, when such costs are at historic lows.

BE LEADERS, NOT FOLLOWERS

With those costs in mind, Intel issued $6.2 billion in senior notes last year, not to fund innovation so much as to finance a stock buyback, Intel’s Jacob reports, adding that low financing costs made such a transaction especially compelling in comparison with the tax cost of repatriating foreign cash for that purpose instead. Apple made headlines earlier this year for using a similar tactic to fund a $25 billion share buyback.

Yet if McLean and Mulford are right that macroeconomic conditions must change before corporate caution gives way, this creates a fundamental problem. Companies, paradoxically, may have to lead the charge in increasing spending—rather than being followers and waiting on increased spending by consumers before they start to invest some of their cash pile—to fuel the very demand they would like to see. The likelihood of such Keynesian economic bootstrapping is not high, however.

Jeff Wallace, a principal in consulting firm Greenwich Treasury Advisors, notes that GE’s German rival, Siemens, grew so concerned during the financial crisis about the solvency of its bank counterparties that it put €5 billion on deposit with the European Central Bank. Many analysts and regulators think banks in Europe and the US still need more capital to shore themselves up. Siemens did not respond to a request for comment.

And US glassmaker Corning was so worried about what might happen to short-term interest rates in the US during the congressional debate over the federal debt ceiling in the summer of 2011 that it withdrew a significant amount of cash from money market funds holding Treasury securities and deposited it in US banks. Sure enough, Washington, DC, seems poised for a fresh round of debate about the debt ceiling, even as US president Barack Obama at press time was focused on promoting new investment in infrastructure, research and education—while offering recalcitrant Republicans a deal on business tax cuts, including a lower rate on corporate income but a minimum rate on repatriated cash.

In any case, caution on the part of most companies makes those such as Exxon, Ford, GE and Intel stand out. But if that also makes this less-cautious quartet lonely, the chipmaker, for one, doesn’t mind. Then again, it may have little choice.

Intel readily admits it missed the technology industry’s recent embrace of mobile devices and tablets, while the PC business stagnated, as evident in the company’s most recent quarterly decline in both revenue and earnings from year-earlier levels. To catch up, Jacob says, the company must spend freely to develop new manufacturing technology despite an uncertain economy. Unlike many companies, Intel’s treasurer notes, it deals with changing macro conditions not by ramping up or cutting back spending on R&D or capital investment but by slowing or accelerating stock buybacks. (The 87 cents per share that Intel pays out to shareholders in dividends involves a less easily modified commitment, Jacob notes.)

Stock buybacks in that sense are the “dial” that the company uses to manage cash as conditions change, says Jacob. “That’s how we modulate it.”

Only time will tell if the unfashionable boldness of Intel and of its few fellow big spenders pays off. For now, their more numerous and cautious counterparts may be content to wait and see.

	Company	Country	Latest Reporting Year	Cash* $(mn)	Cash* $(mn) Previous Year	Cash* Change (YoY)
1	GENERAL ELECTRIC	United States	2012	77,356	84,501	-7,145
2	MICROSOFT	United States	2013	77,022	63,040	13,982
3	PETRONAS	Malaysia	2011	50,595	47,730	2,866
4	CISCO SYSTEMS	United States	2012	48,716	44,585	4,131
5	TOYOTA MOTOR	Japan	2011	35,795	42,223	-6,428
6	PFIZER	United States	2012	32,708	26,452	6,256
7	ORACLE	United States	2013	32,216	30,676	1,540
8	APPLE	United States	2012	29,129	25,952	3,177
9	AMGEN	United States	2012	24,061	20,641	3,420
10	TOTAL	France	2012	22,471	19,053	3,418
11	CHEVRON	United States	2012	21,913	20,071	1,842
12	JOHNSON & JOHNSON	United States	2012	21,089	32,261	-11,172
13	DAIMLER	Germany	2012	19,864	14,116	5,747
14	VODAFONE	Great Britain	2012	19,618	13,545	6,073
15	SONY	Japan	2011	19,178	19,976	-798
16	CHINA STATE CONSTRUCTION ENGINEERING	China	2012	18,819	14,400	4,419
17	SAMSUNG ELECTRONICS	South Korea	2012	18,728	13,325	5,403
18	ROYAL DUTCH SHELL	Great Britain	2012	18,550	11,292	7,258
19	INTEL	United States	2012	18,162	14,837	3,325
20	MITSUI	Japan	2011	17,484	17,433	51
21	THE COCA-COLA COMPANY	United States	2012	16,551	14,035	2,516
22	MERCK	United States	2012	16,141	14,972	1,169
23	RENAULT	France	2012	16,056	12,830	3,225
24	MITSUBISHI	Japan	2012	15,893	16,900	-1,007
25	FORD MOTOR	United States	2012	15,659	17,148	-1,489
			Total	703,774	651,994	51,780
TABLE PART 2
	Company	Country	Operating Revenue ($mn)	Total Assets ($mn)	Capex ($mn)	R&D Expense ($mn)
1	GENERAL ELECTRIC	United States	147,359	685,328	15,126	4,500
2	MICROSOFT	United States	77,849	142,431	4,257	10,411
3	PETRONAS	Malaysia	71,659	150,334	n.a.	10
4	CISCO SYSTEMS	United States	46,061	91,759	1,126	5,488
5	TOYOTA MOTOR	Japan	226,216	373,110	18,650	9,492
6	PFIZER	United States	58,986	185,798	1,327	7,342
7	ORACLE	United States	37,180	81,812	650	4,850
8	APPLE	United States	156,508	176,064	8,295	3,381
9	AMGEN	United States	17,265	54,298	689	3,330
10	TOTAL	France	240,677	226,711	26,263	1,062
11	CHEVRON	United States	241,909	232,982	30,938	1,728
12	JOHNSON & JOHNSON	United States	67,224	121,347	2,934	7,665
13	DAIMLER	Germany	152,686	215,033	6,369	5,514
14	VODAFONE	Great Britain	67,917	215,788	7,056	464
15	SONY	Japan	79,041	161,846	4,657	5,843
16	CHINA STATE CONSTRUCTION ENGINEERING	China	87,360	103,615	1,548	n.a.
17	SAMSUNG ELECTRONICS	South Korea	187,842	169,131	22,059	10,772
18	ROYAL DUTCH SHELL	Great Britain	467,317	360,325	32,576	1,314
19	INTEL	United States	53,341	84,351	11,027	10,148
20	MITSUI	Japan	63,927	109,700	4,435	41
21	THE COCA-COLA COMPANY	United States	48,017	86,174	2,780	n.a.
22	MERCK	United States	47,267	106,132	1,954	7,911
23	RENAULT	France	55,671	99,501	3,756	1,484
24	MITSUBISHI	Japan	63,396	153,061	6,139	57
25	FORD MOTOR	United States	134,252	190,554	5,488	5,500

*Includes cash, cash equivalents and short-term securities (those maturing between 3 months and a year).

Companies where latest reporting year was prior to 2011 were excluded from the list.

Data valid as of July 31, 2013. Data provided by: Orbis by Bureau van Dijk.

	Company	Country	Long-Term Marketable Securities ($mn)*
1	APPLE	US	92,122,000
2	SONY	Japan	75,608,117
3	TOYOTA MOTOR	Japan	54,982,285
4	GENERAL ELECTRIC	US	48,510,000
5	FORD MOTOR	US	36,735,000
6	MITSUBISHI	Japan	27,128,636
7	NIPPON STEEL & SUMITOMO METAL	Japan	19,391,025
8	SIEMENS	Germany	16,830,980
9	QUALCOMM	US	14,463,000
10	PFIZER	US	14,149,000
		Total	399,920,043

*Includes equity and debt holdings and other salable investments maturing in a year or longer.

Data valid as of July 18, 2013.

	Company	Latest Reporting Year	Cash* $(mn)	Cash* $(mn) Previous Year	Change (YoY)
1	GENERAL ELECTRIC	2012	77,356	84,501	-7,145
2	MICROSOFT	2013	77,022	63,040	13,982
3	CISCO SYSTEMS	2012	48,716	44,585	4,131
4	PFIZER	2012	32,708	26,452	6,256
5	ORACLE	2013	32,216	30,676	1,540
6	APPLE	2012	29,129	25,952	3,177
7	AMGEN	2012	24,061	20,641	3,420
8	CHEVRON	2012	21,913	20,071	1,842
9	JOHNSON & JOHNSON	2012	21,089	32,261	-11,172
10	INTEL	2012	18,162	14,837	3,325
		Total	563,449	523,828	39,621

*Includes cash, cash equivalents and short-term securities (those maturing between 3 months and a year).

Companies where latest reporting year was prior to 2011 were excluded from the list.

Data valid as of July 31, 2013.

	Company	Country	Latest Reporting Year	Cash* $(mn)	Cash* $(mn) Previous Year	Change (YoY)
1	TOTAL	France	2012	22,471	19,053	3,418
2	DAIMLER	Germany	2012	19,864	14,116	5,747
3	VODAFONE GROUP	Great Britain	2012	19,618	13,545	6,073
4	ROYAL DUTCH SHELL	Great Britain	2012	18,550	11,292	7,258
5	RENAULT	France	2012	16,056	12,830	3,225
6	TELEFÓNICA	Spain	2012	15,462	8,747	6,715
7	SIEMENS	Germany	2012	14,760	17,480	-2,720
8	NOKIA	Finland	2012	12,526	13,546	-1,019
9	ERICSSON	Sweden	2012	11,793	11,694	99
10	TELECOM ITALIA	Italy	2012	11,468	10,588	880
			Total	162,567	132,890	29,677

*Includes cash, cash equivalents and short-term securities (those maturing between 3 months and a year).

Companies where latest reporting year was prior to 2011 were excluded from the list.

Data valid as of July 31, 2013.

	Company	Country	Latest Reporting Year	Cash* $(mn)	Cash* $(mn) Previous Year	Change (YoY)
1	SURGUT-NEFTEGAS	Russia	2012	12,154	12,416	-262
2	RUSSIAN HIGHWAYS STATE COMPANY	Russia	2012	1,813	1,439	374
3	URALKALI	Russia	2012	1,666	1,018	648
4	ACRON GROUP	Russia	2012	1,633	465	1,168
5	INTER RAO	Russia	2012	1,582	1,352	230
6	MOL MAGYAR OLAJ- ES GAZIPARI	Hungary	2012	1,574	1,293	281
7	SVYAZ-INVEST	Russia	2010	723	1,185	-462
8	GUP MOSKOVSKY METRO-POLITEN	Russia	2011	652	235	416
9	NOVATEK	Russia	2012	606	740	-134
10	ROSO-BORON-EXPORT	Russia	2011	536	1,088	-553
			Total	22,404	20,143	2,261

*Includes cash, cash equivalents and short-term securities (those maturing between 3 months and a year).

Companies where latest reporting year was prior to 2011 were excluded from the list.

Data valid as of July 31, 2013.

	Company	Country	Latest Reporting Year	Cash* $(mn)	Cash* $(mn) Previous Year	Change (YoY)
1	SCHLUM-BERGER	Curaçao	2012	6,274	4,827	1,447
2	TELEMAR	Brazil	2012	3,842	7,377	-3,534
3	YINGLI GREEN ENERGY HOLDING	Cayman Islands	2012	3,052	892	2,160
4	EMBRAER	Brazil	2012	2,380	2,123	257
5	FEMSA	Mexico	2011	2,013	2,210	-197
6	MARVELL TECH-NOLOGY GROUP TECHNOLOGY GROUP	Bermuda	2012	1,919	2,246	-328
7	GRUPO TELEVISA	Mexico	2012	1,874	1,558	316
8	ULTRAPAR	Brazil	2012	1,474	1,457	18
9	GREENTOWN CHINA HOLDINGS	Cayman Islands	2012	1,256	971	285
10	BRF	Brazil	2012	1,249	1,474	-224
			Total	38,001	35,902	2,099

*Includes cash, cash equivalents and short-term securities (those maturing between 3 months and a year).

Companies where latest reporting year was prior to 2011 were excluded from the list.

Data valid as of July 31, 2013.

	Company	Country	Latest Reporting Year	Cash* $(mn)	Cash* $(mn) Previous Year	Change (YoY)
1	PETRONAS	Malaysia	2011	50,595	47,730	2,866
2	TOYOTA MOTOR	Japan	2011	35,795	42,223	-6,428
3	SONY	Japan	2011	19,178	19,976	-798
4	CHINA STATE CONSTRUC-TION ENGI-NEERING	China	2012	18,819	14,400	4,419
5	SAMSUNG ELEC-TRONICS	South Korea	2012	18,728	13,325	5,403
6	MITSUI	Japan	2011	17,484	17,433	51
7	MITSUBISHI	Japan	2012	15,893	16,900	-1,007
8	SOFTBANK	Japan	2012	14,592	12,426	2,166
9	RELIANCE INDUSTRIES	India	2011	13,274	10,039	3,235
10	HONDA MOTOR	Japan	2012	12,811	15,181	-2,370
			Total	217,169	209,633	7,537

*Includes cash, cash equivalents and short-term securities (those maturing between 3 months and a year).

Companies where latest reporting year was prior to 2011 were excluded from the list.

Data valid as of July 31, 2013.

	Company	Country	Latest Reporting Year	Cash* $(mn)	Cash* $(mn) Previous Year	Change (YoY)
1	OOREDOO (QTEL)	Qatar	2012	4.123	5.838	-1.715
2	TEVA PHARMA-CEUTICAL	Israel	2012	2,879	1,096	1,783
3	METRO-POLITAN HEALTH HOLDINGS	South Africa	2012	2,067	n.a.	n.a.
4	TASNEE	Saudi Arabia	2012	1,722	1,236	485
5	SASOL	South Africa	2012	1,606	2,162	-556
6	CHECK POINT SOFTWARE TECH-NOLOGIES	Israel	2012	1,503	1,360	144
7	ISRAEL AEROSPACE INDUSTRIES	Israel	2012	1,331	1,619	-288
8	NASPERS	South Africa	2011	1,281	1,306	-25
9	THE ISRAEL ELECTRIC CORPORATION	Israel	2012	1,112	495	616
10	ZAIN	Kuwait	2012	1,086	1,474	-389
			Total	18,709	9,653	9,056

*Includes cash, cash equivalents and short-term securities (those maturing between 3 months and a year).

Companies where latest reporting year was prior to 2011 were excluded from the list.

Data valid as of July 31, 2013.