The Cash Trap

Cash may be a comfort in an uncertain economy, but it can also be a drag on shareholder value.

From 1995 to 2002, Terex Corp. was a terror on the mergers-and-acquisitions scene, snapping up a string of 22 takeover targets. Since then, the Westport, Connecticut-based manufacturer of construction and mining equipment has kept its checkbook much closer to the vest, as cash-rich private-equity buyers drove prices beyond where it felt it could make disciplined acquisitions. No matter: the $8.2 billion company still managed to grow its revenues by an average of 28.8 percent each year. Shareholders responded by driving up Terex’s stock price from less than $6 at the beginning of 2003 to more than $80 in late September.

Thanks to its stellar performance, Terex ranks sixth among the companies in the Standard & Poor’s 500 stock index (excluding financial institutions) in terms of total shareholder return (TSR) over the past five years. That’s according to a new analysis done for CFO by The Boston Consulting Group (BCG). At 49 percent, Terex’s five-year TSR is well above the average for the top quartile of the S&P 500 (see “The Value Creators“).

Accordingly, Terex has had the luxury of piling up cash on an underleveraged balance sheet — $453 million as of June 30 — at a time when investors are pushing many companies to make big payouts to shareholders. The company did launch a $200 million stock-buyback program last year, but against a market capitalization of $9.3 billion that’s not terribly aggressive.

Terex could buy back more stock, or issue a special dividend. But it is committed to reinvesting in its business for long-term growth, according to Terex senior vice president and CFO Phillip Widman. “We consider our first priority to grow the business we have, meaning through investment in capex or acquisitions that help further our franchise,” he says. “We have a return on invested capital of 40 percent the way we measure it, so investing in our own business makes sense right now.”

Building for long-term growth is, of course, what business schools have been preaching for generations. But it has been surprisingly difficult to do so over the past several years, says Eric Olsen, senior partner in the Chicago office of BCG, a global business-consulting firm. What was once viewed as a strong balance sheet, BCG says, is increasingly viewed by Wall Street as a lazy balance sheet — one that underexploits a company’s assets, either by holding too much cash earning low rates of return or by having too little debt. (Olsen says the credit crunch hasn’t changed that perception, except perhaps in sectors directly affected by the crunch, such as mortgage lending.)

Today, firms with bulging cash coffers risk being penalized rather than praised. And the cash has been piling up. Thanks to strong balance sheets and improved cash flow return on investment, corporate profits have soared to record levels, notes BCG. What’s more, given the recent upheaval in the credit markets and the growing fear of an economic slowdown, companies may not be inclined to draw down their cash reserves anytime soon.


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