COMPANIES sitting on a global cash pile of about $4.3 trillion (£2.76 trillion) are set to fuel a pick-up in takeover deals and handouts to shareholders, providing a prop for equity markets in an uneven recovery.
Asian businesses, bolstered by the strength of their domestic economies, are likely to be most active in mergers and acquisitions (M&A) and capital spending, analysts believe.
Firms in Europe and the United States will also look for M&A deals as a quick route to boosting earnings, but are likely to hand more cash back to shareholders and focus less on capital spending.
“We are now seeing companies raise dividends and spend on M&A, but we do see hesitancy on the capex side and we see that continuing,” said Ad van Tiggelen, senior strategist at ING Investment Management.
He predicted 2011 would be the best year for M&A deals since 2007, with dividend increases the highest for three or four years, helping to underpin equity markets.
According to Thomson Reuters data, companies outside the financial sector (where cash is often held as a regulatory requirement) are sitting on cash and short-term investments worth $1.88 trillion in Asia, $1.3 trillion in the United States and $1.17 trillion in Europe.
These figures all represent a higher proportion of companies’ total assets than at any time for 20 years as firms built up a buffer against a deep economic downturn and a crippled banking system.
China Mobile has amassed the biggest net cash hoard of $42.7bn, ahead of Microsoft with $33.5bn, Google $31.3bn, Apple with $25.6bn and Cisco Systems with $23.6bn.
Jim Wood-Smith, head of research at investment manager Williams de Broe in London, believes there are good reasons for firms to keep cash levels high amid fears the Eurozone debt crisis will spread.
But he thinks companies will start putting some cash to use as long as the world avoids major shocks, if only because it is earning such poor returns amid low interest rates.
“You’re earning next-to-nothing (on cash), so you've got to be looking at ways of making it work,” said the finance director of a European multinational company that has more than $300m of cash on its books, speaking on condition of anonymity.
There are already signs this is starting to happen.
In the first nine months of this year, cash held by listed US companies rose 9.4 per cent, down from a 23 per cent increase last year, and less than the average rise for the past 10 years.
At the same time, M&A deals involving US companies have risen 16 per cent in value, and share buybacks have more than doubled to $250bn, according to Thomson Reuters data.