In Olli-Pekka Kallasvuo’s words, “enough was enough.”
As CFO of Nokia, he’d overseen steady growth in the group’s net cash position since taking over the finance reins in 1998. And at financial year-end on December 31st, the firm’s coffers had swollen to E9.3 billion in cash and cash equivalents, up from E6.1 billion a year earlier. Cutting working capital by E1 billion and accelerating inventory turns, among other measures, helped give the Finnish mobile phone giant the largest cash balance in its 140-year history.
The cash pile, in fact, accounted for 40 percent of the company’s assets; well in excess of industry rivals Ericsson (27 percent) and Motorola (21 percent).
High time, says Kallasvuo, to hand some of that cash to shareholders. In January the E30 billion company unveiled plans for an ambitious share buyback program. Subject to approval from shareholders at the firm’s AGM later this month, Nokia wants to purchase up to 225m shares, equating to around E2.9 billion at current stock prices.
Not that Nokia has a reputation for jealously guarding its cash –typically it pays out between 30 percent and 40 percent of annual earnings, Nokia’s dividend policy is already very generous — the average payout ratio in the tech sector is just 6 percent.
Still, the company’s pile of cash has been growing steadily, and even after the buyback and this year’s planned dividend of E1.4 billion, Nokia will be left with a whopping E5 billion in cash.
Yet Kallasvuo says he can justify that cash cushion. “It’s been discussed a lot here, and interestingly enough a lot of other high-tech companies also have strong cash balances,” he says, citing Cisco (which currently holds $21 billion in cash and liquid investments), Intel ($11 billion) and Microsoft (at $43 billion, the ultimate cash piñata). “All of us talk about the flexibility that a strong cash position gives you, keeping open any strategic options we might want to take.”
But the burning question, not just at Nokia but at a range of companies, is how can their CFOs know whether they’re carrying too much cash? And if they are, should they return it to their shareholders?
Opinions are divided. Indeed, deciding how much cash is the right amount for a business is always more of an art than a science. “You can use financial metrics and ratios but that’s not all of it,” says Kallasvuo. “You really need to look at the industry you’re in, and understand what the market wants. Does the market really feel that you need to continue to invest in research and development, for example?”
In today’s turbulent market conditions, finding the answer is getting tougher and tougher. What’s clear, however, is that finance managers have grown cautious, allowing cash balances to creep up, and in turn, shareholder value to be destroyed.
“There are huge, very dubious ‘revaluation reserves’ and ‘restructuring reserves’ sitting on balance sheets all across Europe at the moment,” says Nigel Manson, an associate at the London office of McKinsey & Company, the consulting firm. “It’s often just a way of separating funds from shareholders.”