Lessons Learned: Prudent Management of Corporate Cash

Posted by | January 23, 2012

Much has been written recently about the amount of cash companies are accumulating through their operations. In an August 2011 report, the Wall Street Journal noted that “non-financial companies in the Standard & Poor’s 500-stock index were holding $1.12 trillion in cash and short-term investments in their most recent reports, up 59% from $703 billion in the third quarter of 2008.”

Further information released today noted that companies increased their cash and short-term investment balances in the fourth quarter of 2011, according to the AFP Corporate Cash Indicators™ (AFP CCI), a quarterly study that measures recent and anticipated changes in U.S. corporate cash balances. Quarter-to-quarter, 49 percent of reporting organizations had greater cash balances at the end of 4Q11 than they had at the end of 3Q11.

Many of these businesses are criticized for not investing more cash into their businesses, and for prolonging the pain experienced by those still unemployed. But many of the organizations criticized are the same companies that were required to rebuild their balance sheets over the past decade—during the recession caused by the tech bubble burst in 2000, which created carnage in a wide number of businesses.

As these cash balances build, shareholders are seeking answers about what will be done with the growing balances. Some suggest stock dividends or share repurchases, which are legitimate suggestions to be considered in a framework of multiple options and scenarios. The reality is that businesses are prudently waiting for greater clarity on longer term economic conditions and worthwhile strategic investments before committing for the long term.

We have groomed a highly talented group of executives in our country that have the benefit of experience through multiple business cycles and understand the dynamics at play. There are still many opportunities to pursue, and I believe we have a great combination of resources and experience here in Corporate America to capitalize on those opportunities. Couple this perspective with the reality of the ever increasing sophistication of technology and certain infrastructures within our world, and you get a picture of the future that offers substantial opportunities to put such capital resources to work.

We at Safeguard Scientifics continue to see a strong pipeline of opportunity for the deployment of capital. We do think this is an indicator of the overall strength of innovation and risk-taking being pursued in the market and we are excited about this trend. While there are still concerns about the macro-economy and the direction of new regulations, we believe we are witnessing a period of tremendous innovation that will help refine and re-shape many industries over the long term.

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