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Stashes of Cash, Not Tax Policy, Holding Back Recovery

October 13, 2010 By Lee Egerstrom, Economic Development Fellow

Money is cheap and accessible for those who have plenty; but it isn’t being put to work on business expansion, new factories and job creation here in Minnesota or in most places in America.

Business news of the past week noted that companies have been accumulating large cash holdings since the start of the national and global recession in 2008. This is because the Federal Reserve has made money inexpensive in an effort to stimulate the economy.

Early signs suggest, however, that companies aren’t using the cash to put people to work or expand the economy. Instead, they’re employing the cash in merger and acquisition (M&A) activity to muscle out competition and expand their market share. This emerging round of industry consolidation doesn’t appear to be leading to job growth here in Minnesota or anywhere in North America.

It may not any time soon, warns P. Richard Bohr, an Asian studies scholar from the College of St. Benedict and St. John’s University near St. Cloud who also teaches international business courses at St. Mary’s University in Minneapolis.

In our global society, will corporate cash and business expansion strategies seek out new entrepreneurs, new technologies and inventions, and new market access, he asks? If so, the cheap money intended to stimulate the U.S. economy is likely to end up in China, India, Brazil and other developing countries that are riding waves of entrepreneurship, Bohr said.

Close to home, entrepreneurs who would start new companies or develop new products complain that it is extremely difficult to raise venture capital and qualify for bank loans.

No similar capital formation problem exists for large corporations that can sell corporate bonds at rates often below 1 percent interest. For instance, Microsoft recently raised $1 billion by selling three-year notes at 0.875 percent interest.
   
A recent New York Times article (“Cheap Debt for Corporations Fails to Spur Economy”)  
noted that corporations are now sitting on $1.6 trillion in cash, more than 6 percent of their total assets – the biggest cash stockpile since 1964. Bloomberg (Sept. 29) looked at the 1,000 largest corporations worldwide and found $2.87 trillion stashed and available for M&A activity.
 
Meanwhile, Julie Triedman, writing for The AM Law Daily, said that low interest rates and corporate cash are pushing M&A activity ahead of the 2009 pace. She cited Bloomberg data showing the value of such deals in the first nine months this year nearly equals last year’s totals.

The folks who “bring good things to life,” General Electric, say they have $30 billion for takeovers in the next few years, according to a Reuters article examining two recent GE acquisitions.

Minnesota-based corporations are undoubtedly poised to play the same game. No attempt was made to dig through Securities and Exchange Commission (SEC) filings to tally Minnesota corporate cash holdings. To do so would imply unintended criticism; our companies must be positioned to meet competition here and anywhere, and that includes buying market shares, innovative product lines and, in some cases, rivals.

For instance, Bloomberg reported that Nestle SA, Europe’s largest company and a rival of nearly all of Minnesota’s food and agriculture companies, has $28.4 billion from recent asset sales and investors now expect it go after takeover targets.

Another deal in the works that could have spillover impact on Minnesota companies’ competitive positions (Mosaic, Cargill and CHS) is metals and resources company BHP Billiton Ltd.’s $40 billion hostile takeover bid for Potash Corp. of Saskatchewan, the world’s largest fertilizer company by capacity.

All this is occurring while American attention is distracted by election campaign debates over what stimulus programs may be working and which are not; and by arguments over tax break stimulus.

Enormous contributions from business lobbies are pouring into campaign coffers to aid candidates who generally spew arguments that tax breaks for the wealthy or business are needed to grow jobs and stimulate the economy.

Such arguments can be made to sound plausible, but only to an extent. If there were direct ties between prosperity and business tax breaks, business deregulation and special breaks for the wealthy, all should be rosy in Minnesota and America. There wouldn’t have been a financial crisis and recession from which we need to recover.

And now, if the accumulated private wealth and the low-cost corporate cash are to be employed, will any of it trickle down to start-up companies and new entrepreneurs? The early signs indicate it is going into M&A activity.

The latter is not all bad. It can strengthen young companies and help them grow. It can bring synergies with stronger partners that can help communities, employees and inventors. But it can also lead to more job layoffs as positions become redundant in consolidated industries.

Bohr, the educator who headed the Minnesota Trade Office in the 1980s, raises equally valid questions about where our tax give-away dollars and where our low-cost money from the Fed will end up going to work. 

If there is a connection at all between jobs and taxes, then we’ve got a lot of candidates espousing non-transparent foreign aid. Just don’t expect the candidates of the special interests to explain it that way.

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