Where is Your Company Hoarding Its Cash?

In today's market, a transparent balance sheet is perhaps the most coveted asset a company can have. With everyone from mortgage lenders to commercial banks, investment funds, and even food processors losing money due to derivatives, mortgage backed-securities, currency hedges, and other items, a clean balance sheet that is flush with cash and no hidden issues is a rare and wonderful thing.
Indeed, this is precisely what made Wrigley's and Budweiser so attractive from a buy-out perspective. It's certainly what convinced the banks/ investors backing the deals to lend the necessary funds for the deals to go through-compare this to the Bank or America/ Countrywide deal in which it's still not clear precisely what Bank of America is buying and what it's not.
However, in today's financial crisis, it's not merely enough for a company to be sitting on mounds of cash. You need to know WHERE exactly that cash is sitting.
After all, it's not like Microsoft just goes and buries $20 billion in its backyard. Budweiser doesn't have a warehouse filled with mattresses stuffed with money. And Coke doesn't have a giant piggy bank the size of a football field just sitting somewhere-though personally I think this might be a good idea since they could turn it into a theme park (desperate financial conditions call for desperate measures to make a buck).
No, corporations with huge cash hoards have to put that money to work somewhere until they use it in a deal or stock buyback or what have you. And therein lies the problem. If you've got $20 or $30 billion, where can you store it safely?
Banks are going under, and the FDIC only insures deposits of up to $250K-they raised limits as part of the mega-bailout. Treasuries are looking less and less attractive with every intervention/ liability the Feds add to the US balance sheet. Agency securities are questionable at best-Taiwan began openly questioning the quality of Fannie and Freddie securities last week.
Again, where do you put all that money?
Honestly, I don't have an answer for this question. But I do know that in today's financial crisis, I'd much rather invest in a cash rich company that details where it's putting its cash, rather than a company that simply states its cash amount on the balance sheet without any specifics.
I'll give you an example.
On a superficial level, Apple (AAPL) and Microsoft's (MSFT) basic business are the same: selling software and hardware related to computers and personal electronics devices. And today, both companies are sitting on similar cash hoards: $20 billion in cash and short-term investments. However, that's where the similarities in balance sheets end.
AAPL provides a line-by-line breakdown of its short-term investments (taken from latest 10-Q):
Cash $294 million Treasury and Agency Securities $6.9 billion US Corporate Securities $9.5 billion Foreign Securities $3.8 billion
Microsoft, on the other hand, provides no specifics, but simply writes the following (taken from latest 10-Q):
Our investments consist primarily of fixed-income securities, diversified among industries and individual issuers. Our investments are generally liquid and investment grade. The portfolio is invested predominantly in U.S. dollar-denominated securities, but also includes foreign-denominated securities in order to diversify financial risk. We invest primarily in short-term securities to facilitate rapid deployment for immediate cash needs...
While we own certain mortgage- and asset-backed fixed-income securities, our portfolio as of September 30, 2008 does not contain direct exposure to subprime mortgages or structured vehicles that derive their value from subprime collateral. The majority of the mortgage-backed securities are collateralized by prime residential mortgages and carry a 100% principal and interest guarantee, primarily from Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, and Government National Mortgage Association. (emphasis added)
Now, I'm not saying one company's cash is necessarily safer than the other's. I'm also not trying to indicate anything about the quality of Microsoft's accounting or balance sheet.
All I'm saying is that of the two, AAPL provides individual shareholders with a much better understanding of where its cash is. Because of this, gauging the safety of that cash-as well as the potential for that cash to be eaten up by a bad bet-is much easier.
With the financial crisis running full force, and losses and write-downs showing up even in the oddest of places-Sadia, a Brazilian meat processor lost a bundle on currency speculation-the transparency of a business's balance sheet is paramount in gauging its market risk.
If you're looking to put your money to work in this environment, you're going to be stomaching a lot of volatility in the process. Knowing the details of the company's balance sheet and cash hoard provides you with just that much more conviction about the quality of its business and financial standing.
You'll need this conviction when the company's share price takes you for a roller coaster ride.