Corporate cash splash raises concern

> Investors want firms to spend more on enhancing the assets they already own during boom times

LONDON: Splashing corporate cash may be in vogue, with bumper share buybacks and record takeovers, but some investors are demanding firms spend more on improving assets they already own.

Of nearly a dozen fund managers contacted by Reuters, three-quarters expressed concern about the way companies are allocating capital during a period of relatively healthy cashflow.

“If you are in boom times, by and large capital tends to be allocated poorly,” Ben Whitmore, manager of the Jupiter Special Situations Fund, said.

After a nine-year bull run in stock markets, many analysts consider British and European companies to be close to peak values, ramping up the risk of over-priced purchases.

“There’s been record volumes of M&A recently and there’s bound to be some complete howlers in that. Time will show what they are,” Whitmore added.

Globally deals totalling US$1.55 trillion (RM6.1 trillion) have been struck so far this year, while in Europe mergers and acquisitions (M&A) have totalled more than US$621 billion, up 151% on the same period in 2017, Thomson Reuters data shows.

The aggregated value of cash only takeovers so far in 2018 has risen by 33% year-on-year while the value of deals using cash and stock has risen by 221%, as companies look to exploit their buoyant share valuations.

“A lot of M&A actually destroys value for shareholders, not adds value ... acquisitions are quite risky, they can be distracting, they have to be integrated effectively,” Sue Noffke, fund manager at Schroders said.

Meanwhile, companies have spent or committed to spend hundreds of billions of dollars on repurchasing stock so far this year, with Apple Inc alone planning to buy back up to US$100 billion of its shares in an effort to bolster its returns.

By contrast, the latest Global Corporate Capital Expenditure Survey from Standard & Poors showed that the top 20 capex spenders among nonfinancial companies in Western Europe invested just shy of US$200 billion in aggregate in 2016.

And across Europe, the Middle East and Africa, companies had stashed € 974 billion (RM4.6 trillion) of cash by the end of 2016, the latest data from Moody’s Investor Service showed, with the ratio of cash relative to revenue at a sevenyear high.

That has in part been fuelled by ultra cheap debt, an era which is expected to come to an end as central banks around the world gradually tighten the loose monetary policy used to see wobbling economies through the financial crisis. – Reuters