Companies Sit On Cash; Reluctant To Invest, Hire

Google's plans to buy Motorola Mobility for $12.5 billion might seem like a lot of money, but the Web giant can easily afford it. At the end of last year, Google was sitting on nearly $35 billion in cash.

And it's not alone. The U.S. economy may be slowing to a crawl, but a lot of individual companies are richer than ever. They're being cautious about how they spend their cash, though.

"Companies are generating and maintaining more cash than they have aggregate uses for," says Rick Lane, a senior vice president at Moody's.

In a recent report, Moody's said the 1,600-plus U.S.-based companies it rates had $1.2 trillion in cash at the end of 2010 — 11.2 percent more than they did a year earlier. Companies that have a lot of cash can use it to invest and hire. That's what Caterpillar is doing, says spokesman Jim Dugan.

"In 2011, our plan for [capital expenditures] is $3 billion, which would be an all-time record for us," he says. The heavy equipment manufacturer plans to spend about $1.5 billion in the United States, Dugan says, "and the focus of cash for Caterpillar is growth."

But a lot of other companies right now are sitting on their cash — using it sparingly, if at all.

Apple, Cisco and Microsoft had each amassed $40 billion or more in cash by the end of last year, according to Moody's.

Reluctant To Invest

Lane notes that many companies were unable to get credit during the last financial crisis, and they're trying to be more prudent about how they spend money now.

"So I think one of the reasons that is contributing to many companies holding onto cash would be the very vivid memories of the severity of the downturn that commenced in mid-2008," he says.

Companies can borrow money very cheaply right now, so instead of paying off their debts, they can sit on cash as long as possible. But there's a more basic reason companies are hoarding money: The U.S. economy simply isn't growing enough.

The labor market is weak, which hampers consumption, notes Charles Biderman, chief executive officer of the research firm TrimTabs. "So without growing income, where's the money to buy more stuff?" he says. "Absent a change in demand, the fact that companies have all this cash, well, good for them. It's not going to help us."

And with the economy limping along, companies are simply reluctant to invest and hire.

"The bottom line is that a large number of very successful U.S. companies are on a wait-and-see mode with the U.S. economy in particular," says Anant Sundaram, who teaches at Dartmouth's Tuck School of Business.

Going Overseas

He says that during recessions, companies usually try to rebuild their balance sheets. They lay people off, they pay off their debts, and they emerge healthier and ready to invest their money again. But not this time.

"That is something we're not seeing a great deal of, and that is leading to the cash increase," Sundaram says.

And this means companies are also not hiring, at least in the United States. Moody's Lane says a lot of American companies make more and more of their profits overseas in fast-growing places like China, Brazil and India.

"What we're finding is a higher percentage in dollar amount of cash across many parts of the corporate universe is being generated and maintained overseas," Sundaram says.

And U.S. companies that earn profits abroad have to pay taxes when they bring it home, so they tend to like to keep money overseas as long as possible.

Business leaders in the U.S. regularly complain that this discourages domestic investment. But even if tax laws were changed, more and more companies are earning a growing part of their income overseas.

And when they get ready to spend the cash they're holding onto, that's where a lot of it will go.