How are recession survivors spending their cash?

• Author: Driscoll, Mary C.

During the recession, CFOs proved adept at liberating cash otherwise trapped in operations. Now, with nearly $2 trillion on their balance sheets, boards of directors and investors want to see growth, and CFOs are focusing on strategy and risk-adjusted return.

As the summer of 2010 rolled into autumn, reports in the business press disclosed that large United States companies were holding nearly $2 trillion in cash on their balance sheets. Viewed another way, "that is about 40 percent more in cash and cash-equivalents, relative to revenues, than they were four years ago," says Charles Mulford, professor of Accounting and director of the Financial Analysis Lab at Georgia Institute of Technology.

During the great recession of 2008-09, chief financial officers had proven themselves very adept at slashing costs and freeing cash that was otherwise housed in operations. They stopped spending on people, capital equipment and business services. Many of the largest cash-laden companies rode the yield curve down and refinanced their debt.

Wherever possible, companies cut overhead, some making difficult but essential moves in a unique moment of time, such as shifting from unionized to nonunionized plants within the U.S.--at least, they could claim, these jobs stayed in America.

Most invested in better working capital management and sought ways to accelerate the cash-conversion cycle. To look good, a host of big companies sought authorizations to execute share repurchase programs, but in reality they did buybacks slowly and carefully.

Meanwhile, back in the boardroom, the growing piles of cash provided comfort when executive anxiety reached an apex in late 2009.

By September 2010, however, the scene had shifted. A growing drumbeat of investor complaints could be heard on Wall Street. "Companies have to start putting cash to productive uses," Wilbur Ross, a well-known financier, said in a CNBC broadcast. One month earlier, high-growth sectors such as technology had lit up with mergers and acquisition activity.

Unsurprisingly, boards of directors began to encourage chief executives and CFOs to switch programs and move from penny pinching to rolling the M&A dice. Wilbur Ross suggested they hunt for acquisitions in consolidating markets.

Not a bad idea. After all, there are strong opportunities for margin expansion when a firm acquires steady revenue streams, brands, patents and jobs--as opposed to creating them. But not every company is in or near a shrinking sector that has valuable assets for sale.

A separate challenge was and remains the murky macro-economic outlook. With forecasters still calling for lackluster U.S. economic growth in 2011 and maybe 2012, many CEOs and CFOs are unwilling to make big, risky M&A bets. Undoubtedly, what annoys CEOs and CFOs the most is that the message coming from itchy investors has merit. At this stage of...