It is said that America is good at technology innovation, and it is easy to understand why this is said. Companies like Microsoft, Oracle, HP, IBM, Intel, andÂ a host of others have established a firm competitive foundation dating back decades or longer. It is also said that we are good at media and entertainment – fields that have straddled with technology to form an integrated segment – and major innovation by Apple, Google, Netflix, and for that matter Facebook and Twitter and countless advertising networks and related platforms, have provided ample basis for saying so. Lastly, it used to be said, before the financial turbulence of 2008, that we are good at finance. Say what you will about Wall Street, but it’s had a solid run and has been at the forefront of global money flows for more than a century. Let’s hold on to these thoughts, to which we will soon return.
A couple of financial trends have been observable lately, which warrant attention: While on one hand certain businesses are unable to tap into capital markets for being too small, others, at the opposite end of the size range and with ample access to funding of all sorts, have been hoarding their profits and preserving cash. This latter trend – particular to the present time – appears (interestingly enough) most pronounced in the assortment of sectors identified above, and especially within the group of afore-named technology and digital media titans. (The hundreds of billions of dollars on the balance sheets of these corporations are of special significance, moreover, for being relatively unencumbered: these are all companies with clean and comparatively debt-free finances.)
And so it seems strange – doesn’t it? – almost counterproductive and a missed opportunity, that while important parts of the general economy are in distress on account of either inadequate capital access or too much debt, there is perfectly good cash without offsetting liability just sitting there, and continuing to pile up. This cash, moreover, is being hoarded by corporations with a substantial vested interest in the well-being of our economy.
Where this collection of observations and economic considerations is leading to, is the following suggestion:Â It may behoove the listed cash-rich technology and media behemoths (and others) to use portions of their cash piles to establish finance companies. In so doing, our national skill set, our strengths in innovation and financial product, would be combined for optimal economic benefit. The subject entities could use their massive excess capital to make loans to small businesses that can support such loans, or equity investments into businesses that need to deleverage or to finance growth but are limited in their access to financial capital, or venture investments in startups that may be constrained by a shrinking venture segment.
It could be quite lucrative for the described companies to pursue such tracks – financially, if the return exceeds that of idle cash, and strategically, if the targeted counterparties represent vertical integration or other expansion opportunities (including local manufacture of technology) or potential customers for end-product. (The model described, incidentally, was implemented with good results – until excesses proved detrimental – by GE Capital for three decades. Excesses don’t negate the idea or model, but may serve as a cautionary tale moving ahead.)
Of course, there is at least one imperfection in the argument laid out, notably in regard to the proposition of idle cash that is hoarded. There is no idle cash, technically speaking, as long as this is not stored in safety-deposit boxes and under mattresses in Silicon Valley. Rather, large quantities of such cash are invested in Treasury securities, and the tech segment is thus already a banker of sorts, only not to the private sector. This is a major issue that needs to be addressed, because competition for private capital from public sector demand does not bode well at all, for any of the parties concerned. But that is a whole other can of worms that would exceed the scope of this narrow article.