There is an interesting article in this week’s Economist, All you need is cash, which talks about the new rush by businesses to accumulate cash in contrast to the massive leveraging that has taken place over the past few years. Of course, not all companies took on huge loans to expand, and the ones who hoarded cash are now in a much stronger position relative to their debt-laden counterparts. Just to look to Japan where their cash rich companies are on target to make a record year in acquisitions. So far they have spent $78 billion on foreign takeovers, as they snap up other firms at knock down prices.
It has always been my view that companies should aim to keep a reasonably large cash buffer. It means that other people will want to deal with you as you have a strong credit rating and you can pay your bills on time, that there’s money in the pot for a rainy day, but most of all, it means that you can be ready to invest in value opportunities when they occur, without piling debt on to your balance sheet and being at the mercy of the credit markets. As Warren Buffet says, be fearful when others are greedy and be greedy when others are fearful.
At my company, Fubra, we prefer to leverage our knowledge and intangible assets rather than our balance sheet by seeking investments where we can add a lot of value for both parties at little marginal cost to our existing commitments. We look for companies who are a good fit to our current operations, and who have realistic valuation expectations, but if they meet those criteria we can act fast. This is the advantage of having strong working capital.
Of course, having cash has some downfalls. While Barclays are happy to pay Abu Dhabi and Qatar 14% interest on their cash, they only pay their sterling business savers 2.5%! All the more reason why you need to be ready to spend it when the right opportunities arise.