Blame it on global chaos, companies turn stingy

Over the past few days, press reports have given wide coverage to the health care unit acquisition by Infosys, the second-largest Indian software services exporter. After years of rapid organic growth, the company is now looking to grow inorganically to maintain revenue growth. Three companies - TCS and Wipro, besides Infosys - are sitting on a cash pile of nearly Rs 35,000 crore. Over the years, these companies have been judiciously using cash to fuel organic growth. But things have changed.The global slowdown in corporate decision-making could now make the organic mode look less attractive.

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Reliance Industries (RIL) recently got the government approval for its proposed joint venture with BP, a global energy giant. Analysts estimate that RIL would have cash to the tune of $10 billion by March 2012. They believe that the company has limited ability to utilise the cash pile as businesses it operates in do not need that much capital.

Cut to Apple, one of the most valuable companies in the world that makes computers and mobile phones. The company is sitting on a cash pile of $76 billion. This works out to a fourth of India’s forex reserves. According to CNN Money , Apple could buy Netflix, ARM Holdings - a semi-conductor co - Research in Motion and Nokia at their current market values - and still have about $15 billion in cash left. The article argues for a dividend payout by the company.

It appears that suddenly, companies have lost their mojo. A McKinsey study reveals that the fear of lower returns is making companies take less risks. When companies have loads of cash, economies are facing a slowdown, which typically invest in acquiring assets or product development.

Yet, many seem to be holding back. “The clear implication is that even amid market volatility and uncertainty, managers are right now probably forgoing opportunities, many of which are in-house,” the survey that interviewed 1,500 executives across 90 countries showed.

“Bypassed opportunities aren’t just a missed opportunity for individual companies: the dearth of investment hurts economies and job creation efforts as well,” the analysis by McKinsey said.

The McKinsey survey highlights an attitude problem with companies, too. “Most executives, the survey found, believe that their companies are too stingy, especially for investments expensed immediately through the income statement and not capitalised over the longer term,” the survey added.

This is clearly bad news for global business. This could slow down creation of new jobs or in general affect decision making. It’s bad news for companies that are offering products and services to global corporations.

The conservative attitude in India could be due to high interest rates. However, it is very clear that this could be the last leg at the top of the interest rate curve and that India would sooner or later return to the high growth path.

Businesses are always making an effort to stay ahead of the curve. It needs to be noted that companies have not shelved any of their expansion plans. India continues to witness strong FDI flows. This is evident from $2-billion M&A deals struck in August 2011.