European companies are heading into 2011 with almost $700 billion in cash, raising pressure on executives to do deals, boost dividends and buy back stock.
Total cash holdings at 466 companies in Europe were $691 billion at the end of September, or 16 percent higher than at the end of 2007, the year the financial crisis began, data compiled by Bloomberg show. Nestle SA, which didn’t report third-quarter figures, is also sitting on $30 billion in cash.
Europe’s largest companies held back on acquisitions and payouts this year as the spreading sovereign debt crisis threatened to undermine earnings and revenue growth. Investors want companies to put their reserves to work in 2011 to help spur increased returns for European stocks, which are headed for their smallest gain in more than a decade this year.
“2011 will be an M&A year and a year of share buybacks and increased dividends,” said Claudia Panseri, head of equity strategy at Societe Generale. “The total amount of cash will decrease going forward because of these three uses of cash. Considering the risk linked to sovereign debt, having safe dividends and cash-rich companies is a good protection.”
Total SA, Siemens AG and Daimler AG are among 12 companies that each held more than $10 billion, the data show, up from five in 2007.
Nestle, the most valuable company in Europe with a market capitalization of 193 billion Swiss francs ($193 billion) is top of the European cash chart after completing the $28.3 billion sale of its majority stake in Alcon Inc. on Aug. 26.
European executives have been more risk averse than their U.S. counterparts. Companies in western Europe have announced 4,374 acquisitions so far this year, with 83 of them worth at least $1 billion.
U.S.-based companies so far have announced 7,078 acquisitions with 135 of them breaking the billion-dollar- mark. The total value of announced deals so far this year is $427 billion in Europe, compared with $616 billion in the U.S.
“There is still a great degree of nervousness in relation to macroeconomic factors and companies are not yet at the point where they are happy to take on increased risk,” said Adrian Fisk, co-head of European mergers at Nomura International Plc. “These factors are currently contributing to a lower deal flow than we have historically seen at this point in the cycle.”
ABB Ltd., the Swiss maker of power transmission gear, said today it plans to bid about $3.1 billion in cash for Baldor Electric Co., putting to use some of the company’s $5.3 billion in net cash. The company said it still has excess cash and will continue to seek deals.
Swelling cash holdings may also lure more feisty suitors, and companies refraining from takeovers may become targets themselves, said Thorsten Winkelmann, who helps manage 3.5 billion euros in equity at Allianz Global Investors.
ACS SA, the Spanish builder with more than 10 billion euros in debt, is attempting a takeover of German construction company Hochtief AG, which is practically debt-free. Germany’s regulator yesterday approved the proposed transaction.
“The risk of big global companies acquiring cash-rich European players is definitely an issue,” Winkelmann said. “M&A activity seems more and more likely in Europe.”
Among companies that have started opening their coffers is Siemens, Europe’s largest engineering company. The Munich-based company said it will boost its dividend by 69 percent for 2010, after holding it steady for three years. Siemens had cash of more than $19 billion at the end of its fiscal year, after refraining from large acquisitions for three years.
After announcing the higher dividend, Siemens Chief Financial Officer Joe Kaeser said on Nov. 11 that surplus capital is a “luxury problem.” The cash holdings marked a record for Siemens and are the third-highest among the companies analyzed, the Bloomberg data show.
“Companies such as Nestle that keep large cash piles have the advantage that they can absorb losses and remain in more difficult markets while rivals give up,” said Thomas Russo, a partner at Gardner Russo & Gardner in Lancaster, Pennsylvania.
Companies built up cash not only by refraining from acquisitions and higher dividends. A rebound in profit also contributed, with earnings per share rising 31 percent at the 329 companies in the Stoxx Europe 600 Index that have reported quarterly results so far. Positive surprises outnumbered negative ones by almost 2-to-1, Bloomberg data show.
So far, the higher earnings have failed to translate into gains on the stock market. The benchmark Stoxx Europe 600 has advanced 3.3 percent so far this year, putting it on track for the smallest increase since 1992. Last year, the index rose 28 percent, after contracting in the two preceding years.
“We don’t think that the financial and general crisis is totally over, so we are sticking to organic growth with little acquisitions,” said Pierre-Francois Riolacci, CFO of Veolia Environnement, the French water utility. “We must be very thorough on cash management.”
In the absence of deals, companies are investing some of their cash in existing factories and product lines. Volkswagen AG, Europe’s largest carmaker, will invest 51.6 billion euros ($71 billion) in the automotive business over the next five years. BASF SE, the biggest chemical company, said it will spend 9 billion euros to 10 billion euros on its main chemical complex in Germany, securing 33,000 jobs.
Pierre-Andre de Chalendar, chief executive officer of French building-products maker Cie. de Saint-Gobain SA, said he will use some of his cash to finance organic expansion, while acquisitions will boost growth by 3 percentage points to 4 percentage points on average in the coming years.
“We’ve cut investment during the crisis in 2009,” said de Chalendar, whose company cut 4,000 jobs in 2008 to weather a construction slowdown. “As there’s growth again, especially in emerging nations, we’re starting to lift it again.”
Still, as European government race to quell a spread of the region’s debt crisis by handing Ireland an 85 billion-euro aid package, many companies remain reluctant to free up cash. The Irish rescue came six months after Greece received emergency loans, and the governments of Portugal and Spain have sought to stamp out speculation that they, too, will require support.
U.S. companies, too, are hoarding almost $1 trillion of cash, a sign Moody’s Investors Service said shows borrowers are still concerned the economy may tip back into recession. Confidence among Americans has remained subdued, according to the Conference Board’s sentiment index, highlighting the risk that unemployment near 10 percent will limit spending, which accounts for 70 percent of the world’s biggest economy.
“Public authorities should be happy that companies make good profits,” said Hermann Scholl, chairman of Robert Bosch GmbH, the world’s largest automotive supplier. “Higher corporate profits mean higher tax revenue and lower expenditure for unemployment benefits. Well-run companies making profits help to bring down these mountains of debt.”
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