The Barbarians Are Back

Remember those rapacious financiers from the 1980s who took over underleveraged companies and stripped them clean of assets before selling them off? They’re back in a somewhat different guise, politely rebranded as “activist investors,” and this time around they are targeting the world’s richest and most powerful firms. The battle between Apple and private-equity titan David Einhorn is probably the best evidence of this comeback. Einhorn brought a lawsuit, recently dropped, asking Apple to part with some of its $137 billion of spare cash in the form of shares yielding a rich 4% dividend. Apple, one of the world’s most profitable firms, said, No, thank you, most likely believing that it could do better things with its money than Einhorn could (a sentiment with which I completely agree).

The battles brewing between corporations and financial capitalists are just starting to heat up. From hedge funder Bill Ackman’s war on controversial nutrition firm Herbalife to infamous ’80s raider Carl Icahn’s recent opposition to Dell’s plan to go private, Wall Street opportunists are pulling out their big guns after holding fire for the past several years.

These “activists” claim to be concerned about good corporate governance. But this is really a fight over the $2 trillion in spare cash sitting on U.S. corporate balance sheets and how it should get spent. Tech firms have a ton of this lucre–Apple is holding close to 7% of corporate America’s liquid assets, much of it overseas–and the raiders say it should be paid out to shareholders. To be fair, some more-thoughtful people agree. Mark Carney, incoming governor of the Bank of England, has said that firms are sitting on too much “dead money” and should invest it or pay it out to investors.

But companies in the crosshairs, along with many long-term investors like Warren Buffett (who publicly advised Apple CEO Tim Cook to ignore Einhorn), say that’s bunk. Shareholder culture in the U.S. has become corrupt and is too focused on the short term. So it’s no wonder companies are pushing back against the pressure from the public markets, either by going private (as with Dell, which has found it hard to orchestrate a turnaround amid Wall Street demands for quarterly results) or by hoarding cash to use as they, and not a couple of bigmouthed shareholders, see fit.

Ideally, companies would invest some of this treasure in the U.S. and create jobs. Many claim they’d like to, but post-2008 political dysfunction in Washington has created uncertainty about things like tax policy, making this hard. That argument is at least partly disingenuous; a report by Capital Economics shows liquid assets held by nonfinancial firms have been growing since 2000, meaning cash hoarding began well before the financial crisis.

The truth is that there are many reasons that firms haven’t parted with their cash–some benign, some less so. One factor is the move toward just-in-time manufacturing. That allows companies to hold less inventory and be more nimble, but it also requires more cash in reserve to finance quick ramp-ups in response to product demand. Companies are, in essence, becoming their own banks, something that’s already common in places like Germany. Then there’s the fact that most of the world’s growth happens outside the U.S., and firms need to invest where the growth is.

A less savory reason for cash hoarding is tax avoidance. Apple keeps funds abroad in part to skirt U.S. taxes on foreign earnings. This technique is particularly common among cash-rich technology companies and investment firms because of laws that make it relatively easy to move intangible assets like intellectual property abroad. Ideas that may have been dreamed up by engineers in Silicon Valley are easily converted to patents that live (and can only be taxed) in Asia or Europe.

Nobody involved in these shareholder battles has completely selfless motives. Einhorn may be less worried about shareholder value than his personal balance sheet, since he’s been long on Apple while its share price has declined 40% since its peak last September. But the point isn’t who has more to gain, corporations or financiers; it’s that we all have something to lose. The barbarians at the gate have unwittingly shed light on some major problems with our system of shareholder capitalism. It’s afflicted by short-termism of all kinds, and we’re headed into a growing debate about how to reform it. Many smart folks are calling for not only corporate-pay and tax reform but also a more Germanic-style stakeholder capitalism that can spread the benefits of a company’s growth more evenly among labor, management and shareholders. (All those groups are represented on the boards of German companies.) If that’s the result, there may be an upside, beyond share price, to all this “activism.”