Let the Empire Building Begin

By Peter Lauria

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It’s more than the gross national product of almost every country in the world—more than India’s, more than France’s, more than the United Kingdom’s. It’s such a large sum that if it were divided among the entire United States population, each of us would get more than $10,000. Yes, $3.8 trillion is an enormous sum, and it just happens to be the amount that US companies are holding in their cash reserves. The question is: Will those firms break open the piggy bank in 2025?

It certainly seems that way. Already, some major firms have made headlines with mergers with eye-popping valuations—$26 billion for a deal between two energy firms, $14 billion spent by a tech firm to acquire an AI innovator, and so on. Indeed, with inflation leveling off and interest rates coming down, leaders are becoming eager to spend, be it on research, AI, or mergers and acquisitions—which shot up 33 percent in the US and 17 percent globally through most of the year. “Leaders have to start putting the money they are sitting on to work,” says David Larcker, an accounting professor emeritus and director of the Corporate Governance Research Initiative at Stanford University’s Graduate School of Business.

*Another $1 trillion in cash is held by small and midsized firms not included in the S&P 500.

Firms built up their reserves during the past few years by cutting back on expenses, laying off workers, and slowing investments, among other measures. Anxiety about everything from wars to recessions put the brakes on spending too. “A lot of CFOs have been sitting on their hands for the last two years,” says Barry Toren, leader of Korn Ferry’s North American Financial Officer practice. Indeed, the slowdown in activity was everywhere, with even share-repurchase programs down and cuts in dividend payments rising. In all, firms reduced capital expenditures by two-thirds last year.

But the change in the C-suite’s attitude towards spending makes some analysts just as nervous as firm leaders have been about economic conditions. Charles Elson, founding director of the John L. Weinberg Center for Corporate Governance at the University of Delaware, says leaders tend to spend their hoards of cash in ways not beneficial to shareholders or the organization. Already, many investors have started to question not only some pending mergers, but also the huge sums firms are pouring into artificial intelligence—with little return on investment to show for it. “There’s nothing more dangerous than a company with a huge cash pile,” he says.

In particular, Elson worries that leaders will fall prey to “empire building” simply because they have the money to spend. Michelle Lowry, a professor of finance and corporate-governance expert at Drexel University’s LeBow College of Business, agrees, pointing to the long historical record of mergers and acquisitions failing to create shareholder value. After a competitor does a deal, she says, lots of leaders feel pressure to keep pace by doing one of their own. “Once a competitor does something, leaders start wondering if they need to do something, too,” says Lowry.

To be sure, Toren says a lot of companies got burned in the aftermath of the pandemic by moving too quickly on deals and other investments. He says CFOs still have “fresh scars” from buying or investing at excessively high valuations. Still, he says, firms are holding too much dry powder—finance-speak for the cash on their balance sheets—to remain on the sidelines much longer. On top of that, experts say that sitting on the cash for too long could arouse unwanted attention from activists. As interest rates decline, cash in the bank won’t earn as much, negating the rationale for parking it. And with a new administration in the US about to take office, Larcker says leaders will need to make some hard choices about what to do with their cash—or else activists will make those choices for them. “Activists have lots of ideas about what companies could be doing with their money, if leaders don’t.”

Photo Credits: John Lund/Getty Images; USSR/Getty Images