Instead of investing in growth, companies this year have been holding more than $1.4 trillion in cash – close to a record $1.65 trillion in 2014. Oracle’s $56 billion cash stockpile is 1.5 times its sales and Cisco’s $60 billion in cash is 1.2 times its sales. Eleven companies have cash reserves double their annual revenue.
And it’s not just Fortune 500 companies. According to the Middle Market Center, more middle market firms plan to hold onto cash in 2016. Fewer of them are willing to invest extra money or plan to expand in 2016.
Have U.S. Companies Stopped Investing In Growth?
Companies that stockpile cash don’t invest in stock buybacks and dividends, research and development, other organic growth initiatives or mergers and acquisitions. A strong balance sheet is important, but the levels of cash held by nonfinancial S&P 500 companies is astounding! They may be worried about the economy or the upcoming elections. But there’s another possibility: all that money on the sidelines portends robust M&A activity in 2016.
Tax Savings
Publicly traded companies also are stashing profits offshore to avoid paying taxes on them. The U.S. corporate tax rate is one of the highest in the world and tax inversions in particular are being driven by the pursuit of tax savings rather than for strategic reasons. .
The latest example is Pfizer and Allergan’s proposed merger which would relocate the company to Ireland and away from the U.S. corporate tax rate. Other companies that have done this include Chiquita, Perrigo, Medtronic, Endo, and Actavis despite calls for stronger restrictions on tax inversions by Congress and President Obama. Pfizer already has found ways to save on taxes even without the acquisition. The company has designated $74 billion as “indefinitely’ invested abroad.
Invest in Growth Now
As other companies hold onto cash, you have a unique opportunity now to invest in your future. Do this by developing a long-term strategic plan, investing in new products, services or equipment, or growing organically. Or pursue the faster, more powerful vehicle of strategic mergers and acquisitions. Middle market companies can seek privately held, not-for-sale deals that focus on long-term growth rather than on cost savings or short-term quarterly updates with shareholders. This increases the likelihood of a successful transaction and sustainable growth.
Middle market companies cannot afford to dwell on cost savings and sit idle. Make sure you are thinking about long-term growth and how your company will not only survive, but thrive.
Is your company hoarding too much cash? Or are you investing in future growth?
