Are you sitting on too much cash? What is your decapitalization strategy?

by Erin McCune on March 23, 2007

in Treasury & Cash Management

The spring issue of Strategy+Business wonders what corporations are going to do with the mountain of cash they've accumulated and evaluates options for spending/investing the cash:

Issue46_coverthumbUntil recently, excess liquidity seemed like a
smart strategy. It was insurance against risk and provided capital for
growth. But now, with balance sheets largely mended, cash flow
volatility easing, the outlook for corporate earnings generally
improving, and interest rates on the rise, the benefits of keeping
large amounts of cash on hand are less easy to discern. This leaves
many companies facing a troubling dilemma: Just when the actual need
for excess cash has decreased, they have too much liquidity. They’re
hoarding capital instead of putting it to good use, wasting critical
opportunities to benefit from it.
And they’re making themselves
vulnerable to corporate raiders — private equity firms and hedge funds
that would like nothing better than to move in on an organization with
large sums of money in the bank.

In this environment, a so-called decapitalization
strategy that reduces the cash on hand to a sufficient amount for
day-to-day business and growth — an approach that in turn can
simultaneously enhance creditworthiness and return on equity — offers
the most compelling economics. The purpose is not purely to minimize
cash, but also to realistically determine how much liquidity is
required for both routine and strategic operations and to wisely
earmark the rest of the money for shareholders and debt reduction

Read more:

Too Much Money
by Justin Pettit
Spring 2007

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