Tradier Rundown

Cash-Rich Balance Sheets: A Dilemma for Policymakers and Regulators

Silicon Valley Bank, Signature Bank, and Credit Suisse recently learned the hard way that cash is king, as they are now nothing more than footnotes in financial history.


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In 1988, former Volvo CEO Pehr G. Gyllenhammar said, “Revenue is vanity, profit is sanity, but cash is king.” He may not have been the original author of the quote, but it is critical for analyzing the data in financial statements. Market turmoil causes many investors, traders, CEOs, and CFOs to turn to cash as it is the most liquid asset for purchases, settling debts, and ongoing operations. Silicon Valley Bank, Signature Bank, and Credit Suisse recently learned the hard way that cash is king, as they are now nothing more than footnotes in financial history.

With the stock market under pressure, bank failures, rising interest rates, and uncertainty at the highest level in years, cash is the asset that counts.

Cash-rich companies stand the best chance of surviving and thriving during market turmoil. However, the leading cash-holding firms and individuals pose a conundrum for regulators and policymakers that worry about antitrust issues that create monopolies and oligopolies.

 

The leading cash-rich companies

  • Apple (AAPL) and Alphabet (GOOGL) have over $160 billion in cash on their balance sheets in 2023.
  • Microsoft (MSFT) and Amazon (AMZN) had over $86 billion in cash.
  • General Electric (GE), UnitedHealth Group (UNH), Meta Platforms (META), and Pfizer (PFE) had over $50 billion in cash.

 

The top cash-rich people

  • Net worth and cash balances are not mutually inclusive.
  • The wealthiest people with over $100 billion fortunes in 2023 are Bernard Arnault and family, Elon Musk, Jeff Bezos, Larry Ellison, Warren Buffett, and Bill Gates.
  • While there is no concrete data on individual cash holdings, Warren Buffett’s Berkshire Hathaway had $129 billion cash at the end of 2022.

 

The recent financial issues

  • S. bank failures, UBS’s takeover of Credit Suisse, and shaky stock and bond markets have likely increased the demand for cash holdings among companies and the wealthiest individuals.
  • Geopolitical turmoil and uncertainty make cash and hard assets more attractive. Gold, the hard currency with the longest history, flirted with the $2,000 per ounce level in March 2023.
  • Small-cap companies face the most significant challenge. The IWM, reflecting the Russell 2000 small-cap index, was at the $178.40 per share level on March 31, up 2.3% in 2023. The QQQ and SPY ETFs have moved higher than IWM on a percentage basis since December 30, 2022.
  • Small-cap companies often need financing to grow and survive. Higher rates and tighter credit have weighed on the small-cap sector.

 

Cash during turmoil creates opportunities

  • Weakness in small-cap stocks and challenges for emerging companies has trimmed their valuations.
  • Bank financing has become prohibitive and, in some cases, unavailable.
  • The environment creates bargains for cash-rich companies willing to provide loans or purchase equity on favorable terms.
  • M&A activity may increase with accretive acquisitions for companies with significant cash hordes.

 

The dilemma for governments

  • S. and European governments have expressed concerns about the leading companies’ size, scope, and dominance.
  • Leading companies with growing balance sheets lead to more influence and antitrust issues.
  • Increased regulations and rules that limit cash-rich companies’ power and prevent monopolistic practices can also choke the economy. Rising interest rates and tighter credit from financial institutions could transfer financing from banks to well-capitalized cash-rich companies.
  • Regulators and legislators face a dilemma in 2023. Avoiding a recession or worse may depend on balancing regulation and legislative initiatives that could create monopolies and oligopolies.

 

Thanks for reading, and stay tuned for the next edition of the Tradier Rundown!

 

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