What happens when companies bulge with cash?
Murillo Campello, the
Lewis H. Durland Professor
of Management and professor
of finance, got the attention
of both European and U.S.
media in February, following
his keynote address to European
central bankers on February 10,
2012, at a conference hosted
by the Banque de France, titled “Firms’ Financing and Default Risk
During and After the Crisis.”
Campello’s address focused on the ways in which firms managed liquidity and crafted their own financial policies during and after the financial crisis—policies and practices that have resulted in huge corporate cash reserves.
“U.S. firms have more than $2 trillion in cash sitting on their balance sheets, cash they are holding due to uncertainties in the economy that make it difficult to invest or build from the ground up,” Campello says. “The question is: how will they use the cash when they are ready to spend, and can and will they make good choices in the absence of tight monitoring and credit-market scrutiny?” One thing seems fairly certain, Campello says: There will likely be a tsunami of cash-based merger-and-acquisition activity as the global economy stabilizes, where cash trapped in large companies is used to buy existing firms.
“We may see hostile takeovers, in particular — especially in Asia and South America, where economic growth is occurring and U.S. corporate cash is currently parked for tax reasons,” he says. “Regardless, it will be good to be in investment banking in the next few years.”
Media outlets that wanted to hear more from Campello on how firms’ might use their cash reserves included the News Blaze website (Feb. 14), France’s Les Echos (March 19), and Bloomberg, in its Mergers newsletter (March 19), distributed through its subscription-only Bloomberg terminals.