

Companies Are Piling Up Cash - dpapathanasiou
http://www.nytimes.com/2008/03/04/business/04cash.html?ex=1362286800&en=2ad4d7b89b86c518&ei=5090&partner=rssuserland&emc=rss&pagewanted=all

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dpapathanasiou
Interesting article for many reasons, but the most relevant part for this
audience is the likely increased number of acquisitions in the tech space:

" _... companies, especially in the technology realm, have enough cash to
expand their market share through acquisitions._ "

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yzeli
So the point of the upcoming tax relieve is to inject money into the economy
via consumer spending to prevent the recession. Yet, at the same time, money
is resting in the savings account of companies to protect them from the
recession. These two approaches to dealing with the economy on behalf of the
government and companies seem to contradict each other.

Also, isn’t the company’s goal to maximize shareholders’ return on their
investments? Of course, one can make a case for storing cash to increase long-
term returns, but if the company is retaining the cash for its sake, let the
shareholders have it. I’d rather have the companies I invest in make me money;
otherwise, I have a savings account on my own.

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redorb
wait for smaller companies to feel the crunch, then buy them. Cheap expansion
model.

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byrneseyeview
All right. Let's say you're correct, and companies are hoarding cash to
manipulate the financial system. Furthermore, let's say that the Fed is not
going to react to this.

ExxonMobil made about $40 billion in the last year. If they save every single
dime (in cash, not in savings accounts, investments, or anything else that
transfers liquidity), they will be able to reduce the money supply by -- wait
for it! -- almost 3%! That is a gross change of 3%. Factor in the expanding
money supply, and Exxon hasn't even reversed inflation, much less brought
about a deflationary crunch.

Even if they can do this, how much do they benefit? Exxon will have sacrificed
the interest on $40 billion in cash (that is a lot of money, even these days)
in a risky scheme to reduce asset prices. But Exxon isn't the only bidder --
it has a market value of $460 billion, compared to a global market value of
$51 trillion (<http://en.wikipedia.org/wiki/Market_capitalization>). So if
Exxon is using their stock, and they're a rational actor like everyone else,
they're going to take 100% of the risk for less than 1% of the benefit. In
other words, the total return on their 'investment' in deflation has to be at
least 10,000%!

And even then, you have to factor in their shareholders' reactions.
Manipulating the money supply is not exactly a great use of corporate cash,
and you can't even admit that you're doing it if you want the manipulation to
work (otherwise, other actors will treat the mysterious, tiny drop in money
supply as a temporary aberration, knowing that Exxon will cut it out some
day). Given this apparent flagrant waste of corporate resources, you might
expect their stock to drop precipitously. Exxon earns about 39% on equity
(probably something closer to half that on marginal equity). Dropping that to
zero won't make shareholders happy, and I don't think that risk is priced into
the stock at $86/share.

So. Your theory is insane.

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redorb
you took it insanely; I mean what I said, they are holding cash, while other
companies struggle - then acquire. Them holding the cash has nothing to do
with the other company.

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byrneseyeview
"Buy stuff with the cash you haven't already spent on buying stuff" is not
exactly a strategy.

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moog
So, a naive interpretation of this state of affairs is companies are ripping
off consumers by over-charging them, and are also partly responsible for the
credit crunch?

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pchristensen
Nah, they're just not hiring and reinvesting at the moment. They haven't
jacked up prices or anything, just reining in their business.

