Depositors of banks in Cyprus now fear they have less money than they thought while US corporations have plenty of cash to hand – $1.45 trillion and rising, according to Moody’s. But whose money is it, anyway?
Michael Dell clearly thinks it is his. The Dell founder wants to repatriate up to $7.4 billion of his company’s overseas cash hoard in order to help finance his bid to take it private with Silver Lake, the private equity firm. Activist investors such as Carl Icahn and David Einhorn think more should be given to shareholders, to prevent executives wasting it.
This in turn outrages Martin Lipton, the lawyer who invented the poison-pill defence. He believes they are “sacrificing the future for a quick buck” and compares pressure on US technology enterprises to share cash to the “bootstrap, bust-up, junk-bond takeovers” of the past, which “laid waste to the future of many great companies”.
The truth is, it does not belong to any of them. Corporate cash is no more the property of shareholders than a rainy-day fund of executives, hoarded in case something comes up. It is the product of companies such as Apple, which held $137 billion in cash at the end of 2012, having done well. It belongs to the enterprise, not to either party.
A company, being inanimate, can’t decide what to do with its cash. That is the task of managers, overseen by a board of directors and monitored by shareholders when they go astray. The kind of arguments we are now seeing are not evidence of chaotic dysfunction, as Lipton argues. They are a sign of the system working as designed.
The point is that neither side can be trusted, any more than the public could be trusted if someone placed an enormous pile of cash in the middle of the street as people walked by. They are there to watch each other, and to raise the alarm if the other makes off with it.
This safeguard is working better than at any time in the past few decades, as the examples of Apple and Dell illustrate. Neither a chief executive involved in self-interested financial engineering nor a hedge fund manager seeking a short-term return is immune to challenge.
The balance of power has slowly shifted, from the postwar era of entrenched management to a period in the 2000s when corporations readily handed out cash to shareholders under pressure from activists. The amount distributed by Standard and Poor’s 500 companies using share buybacks increased 18-fold between 1987 and 2007.
It arguably went too far. William Bratton and Michael Wachter, two US law professors, have argued that the shareholder pressure to raise short-term return on equity was one reason why banks over-leveraged their balance sheets in the run-up to the 2008 crisis – and then collapsed. They cite this disaster as a good reason for companies to beware shareholder empowerment.
There is, however, a big difference between a bank with an equity base of 5 per cent of its assets and Apple, which is awash with cash. Even David Einhorn, the hedge fund investor who wants Apple to issue new preference shares with a 4 per cent yield, says it should keep $20 billion under the mattress.
High margins and a global market have brought the elite technology groups more cash than they have any use for. Moody’s estimates that the technology sector in the US holds $556 billion in cash – 38 per cent of total corporate cash reserves. Apple will have $170 billion by the year-end unless, as Tim Cook, its chief executive, promises, it gives some to shareholders.
It is hardly a corporate governance outrage for Einhorn to suggest a way for Apple to do so. Warren Buffett, the eminent investor, advised Cook to “ignore Einhorn” and focus on business, but Buffett is no stranger to extracting money from companies by using high-yield preference shares, as Goldman Sachs, Bank of America and General Electric know.
It would be strange for investors always to wait meekly for a handout, like Maundy Money from the Queen, when a company has lots of it. Lynn Stout, a law professor, notes that “as a matter of law, shareholders ... are entitled to receive nothing from the firm unless and until the board of directors decides they should receive it”. They might as well ask.
Indeed, balance sheet structure is an issue on which fund managers have useful opinions. They are less to be trusted on corporate strategy, which is not their speciality. As Einhorn said about Apple, “we aren’t here to offer strategic thoughts on how they operate their business – they are the experts”.
It may give Lipton apoplexy, but there is no harm in investors challenging executives and a board of directors if they are hoarding cash from caution or laziness. This does not mean that investors are always right – the money could turn out to be useful in future – but it is a fair debate to hold publicly.
The bigger question, to which Lipton alludes, is not whether the managers or the shareholders should decide. It is whether short-term investors that pressure companies for dividends or share buybacks are behaving against the interests of the long-term shareholders. That is the trap into which banks fell before the 2008 financial crisis.
Executives have to be alert to this, and to repudiate cash handouts that sound nice but would make it harder to build a profitable and sustainable enterprise. They need not follow the caricature version of “shareholder value” that sees the job of managers as to maximise the current share price at all costs.
But US technology companies, several of which could bail out small eurozone countries without breaking a sweat, are not victims of corporate raiders. They are simply being asked to make use of their wealth.
Copyright The Financial Times Limited 2013