Unlocking the Potential of Cash Reserves: How Companies Can Strategically Deploy Their Wealth for Growth

In recent years, companies around the world have been accumulating large cash reserves. According to the Financial Times, the total cash pile of the world’s top 2,000 companies reached a record $6.9tn in 2020, up from $5.9tn in 2019. This is a significant increase and represents a substantial amount of money that could be used to fund mergers and acquisitions (M&A) and acquire new technologies faster.

One reason why companies are holding on to large amounts of cash is the uncertain economic environment. The COVID-19 pandemic has created a lot of uncertainty in the business world, with many companies uncertain about the future of their operations. By holding on to cash reserves, companies can protect themselves against unexpected downturns in the market, ensuring that they have enough resources to weather any economic storm.

However, this accumulation of cash has also created a challenge for companies. With interest rates at historic lows, holding large cash balances is not as lucrative as it once was. This has led many companies to consider alternative uses for their cash, including M&A and investments in new technologies.

M&A is a common way for companies to use their cash reserves. By acquiring other companies, companies can expand their operations, increase their market share, and gain access to new technologies and capabilities. In recent years, there has been a surge in M&A activity as companies look to take advantage of low interest rates and favorable market conditions. In fact, according to data from Refinitiv, global M&A activity reached $3.6tn in 2020, up 8% from 2019.

In addition to M&A, companies are also using their cash reserves to invest in new technologies. The pace of technological change is accelerating, and companies that fail to keep up risk being left behind. By investing in new technologies, companies can stay ahead of the curve and remain competitive in their respective markets. This includes investments in areas such as artificial intelligence, machine learning, and the Internet of Things (IoT), which are expected to drive significant growth in the years to come.

Long-term view

Holding cash reserves and not engaging in mergers and acquisitions can have both positive and negative effects, depending on the specific circumstances of each business. Here are some potential impacts:

Positive effects:

• Increased financial stability: Holding cash reserves can provide a buffer against unexpected expenses or changes in market conditions. This can help SMBs weather economic downturns and maintain financial stability.
• Avoidance of debt: If a company chooses not to engage in M&A, it can avoid taking on debt to finance acquisitions. This can reduce the business’s overall financial risk.
• More control: By not merging with or acquiring other companies, business can maintain more control over their operations, culture, and strategy.

Negative effects:

• Missed growth opportunities: By not pursuing M&A, businesses may miss out on potential opportunities to expand their operations, enter new markets, or acquire valuable intellectual property or technology.
• Limited resources: Holding cash reserves can tie up capital that could be used for other purposes, such as investing in research and development, hiring additional staff, or expanding marketing efforts.
• Increased competition: By not acquiring other companies, businesses may leave themselves open to competition from larger businesses with deeper pockets and broader capabilities.

Ultimately, the decision to hold cash reserves and avoid M&A will depend on the specific goals, needs, and resources of each company. While there are potential advantages and disadvantages to each approach, what matters most is that the chosen strategy aligns with the business’s long-term objectives and supports its overall growth and success. Companies around the world are holding on to large amounts of cash reserves, which could be used to fund M&A and acquire new technologies faster. While there are benefits to holding cash, such as protection against economic uncertainty and tax benefits, companies need to be strategic in their use of cash. By investing in M&A and new technologies, companies can stay ahead of the competition and position themselves for future growth.