Monday February 18, 2013

Give back unused cash to shareholders

Excess cash sitting idle on corporate balance sheets can be the subject of discontent among shareholders.

Gurmeet Kaur Gurmeet Kaur

Corporate notes by Gurmeet Kaur

CASH is king. This mantra applies both to investors and their companies. Having a ton of cash, companies have the opportunity to grow via acquisitions. Money can also be used to squeeze out the competition.

But excess cash sitting idle on corporate balance sheets can be the subject of discontent among shareholders, taking recent developments at Apple Inc as an example.

Apple, perhaps the world's most reknown company as the maker of iPhone, is facing a rebellion from an influential investor, hedge fund manager David Einhorn of Greenlight Capital who wants the company to stop stockpiling cash and instead give some of it back to shareholders.

Apple has some US$137bil (RM423.8bil) in cash and its once rapid growth has slowed in recent years.

The Apple incident raises the old debate: If companies are unable to demonstrate using their cash effectively, would the right thing to do be returning part of it to shareholders?

In the United States and the United Kingdom, there seems to be heightened shareholder activism in this area as a fair share of large companies have been unable to deploy their cash pile because of the slowing economy.

The Apple case has also shifted the attention to companies like Google on whether it should consider doing the same.

Last year in India, Infosys institutional shareholders had called for top-level changes in the company's management and pushed for the return of the company's excess cash to shareholders through either a higher dividend payout or a buyback offer.

The good news, though, is Bursa Malaysia has a number of cash-generating companies that often return cash to shareholders. But, most of these companies have tended to be multinationals. Hence, the high payouts have also been driven as a means for these firms to repatriate their profits back to their parent companies abroad.

Another set of companies that could be doing more for their shareholders are those that may not be generating a lot of cash, but are sitting on a pile of valuable assets. If these companies have no definitive plans for these assets, then shouldn't they be considering unlocking these assets by selling them and returning the money to shareholders?

Property companies come to mind, especially those whose land-banks have yet to be revalued. As a result of not doing much with this land and, by extension, for the shareholders of these companies, these property stocks tend to trade at paltry valuations, despite the rich assets these companies have.

Worse, a few of these property companies have become privatisation targets of the major shareholders. The major shareholders would justify the exercises as being driven by the market not ascribing a high enough value on the companies.

But the converse is also true: The major shareholders, who are clearly in control of the companies, have not done enough to make the assets of their listed companies work to the benefit of shareholders.

So, there is room for more shareholder activism to question the management/ownership of those companies.

There have also been instances where listed companies have deployed excess cash to investing in stocks and trading them an area where they have no competitive advantage and taking an unnecessary risk, according to some quarters, as they would seem to be deviating from the core business.

Clearly, greater vigilance of shareholders would keep management on their toes, whether it is the right strategy to take or should not that surplus money be returned to shareholders for them to decide how they want to use it.

A recent example of attempted shareholder activism ought to be mentioned. This was the case of Bhd where a little-known UK fund, Laxey Partners Ltd, had sought to shake things up at Bursa's only listed closed-ended fund.

In any case, Laxey may have picked the wrong stock to seek a change.'s higher performing and well-known maverick fund manager Tan Teng Boo is no easy pushover. Shareholders have been and remain impressed by Tan's returns and do not wish for to end.

But what's noteworthy was this: that Laxey was seeking to have the fund dissolved and the stocks in's portfolio sold and the money distributed to shareholders. By its assessment, should be more proactive in reducing the substantial discount the fund's market price was trading at against its net asset value.

Laxey is symbolic of shareholders who want more from their management. In principle, that behaviour is not only healthy for our market, it is markedly absent.

Deputy news editor Gurmeet Kaur thinks there are influential Malaysian investors in the likes of Apple's Einhorn who can flex their muscles and play a more active role in raising issues that are important to shareholders.

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