Cash flow is king?
Wary European firms are sitting on a cash pile of US$475 billion, but they may risk losing out to their US rivals on the acquisition front
European companies are hoarding more than three times the cash they held a decade ago as the region heads for a second year of recession, putting them at risk of losing out to US rivals boosting acquisitions and investment.
"Many European companies are taking a conservative view with respect to their capital structure and keeping meaningful cash positions," said Francois-Xavier de Mallmann, head of European investment banking services at Goldman Sachs in London. "They find it challenging to predict the combined impact of higher unemployment, higher taxes and lower public spending on consumer demand and their top line."
The euro area would shrink for two consecutive years for the first time since the common currency was introduced, the European Commission predicted on last week, scrapping an earlier growth forecast. Western European companies have announced US$50 billion of acquisitions so far this year, almost half the total a year ago, while purchases by US companies almost doubled to US$184 billion, data shows.
Daimler, whose cash and cash equivalents rose 15 per cent last year to €11 billion (HK$112.75 billion) at the end of December, encapsulated the mood in European boardrooms.
While the company would roll out 13 new models with no predecessor in the next eight years, the maker of Mercedes-Benz vehicles did not plan any "major" acquisitions, chief financial officer Bodo Uebber said. "The liquidity is a sedative," he said. "We want to be prepared for uncertain times."
To preserve cash, European companies are also limiting payouts to shareholders. The dividend yield of companies in the Stoxx Europe 600, excluding financials, will probably stagnate at 3.45 per cent this year, according to analyst estimates.