As the level of cash stockpiled by companies grows, so do the disputes between shareholders and management. The Financial Times reviews the positions being staked out by activist shareholders who want management to pay out more of that money. It’s no surprise that there are disagreements about whether the amount of cash held is too much. One attorney for activist shareholders is quoted saying that “There is concern that such high levels of cash may end up being used for less than optimal purposes.” What I found interesting in the article was the discussion of the macro determinants. The recent financial crisis undermined the ability of activists to fund acquisitions using debt, leaving management safer to build up their piles of cash. As the crisis subsides and debt financing becomes easier, the market for corporate control may be heating up. In this story, what determines how much cash companies accumulate isn’t the internal needs of the companies—not the ebb and flow of the need for cash, nor the ebb and flow of investment opportunities—but the external dynamics of the market for corporate control.
This is in-line with the model of the takeover market being developed in a series of papers by Bart Lambrecht and Stewart Myers — see here and here.
Betting the Business 