The Rich List

In the fast-consolidating steel sector, with multi-billion euro megadeals now commonplace, Salzgitter has kept a low profile. In March, when news broke that the German steel group was sizing up Algoma, a Canadian rival, expectations of a bidding war among cash-rich trade and financial buyers pushed the share price of Salzgitter's target sharply higher. The German company backed away from a deal.

"For the time being, it's difficult to find anything in steel for a realistic price," says Heinz Jörg Fuhrmann, Salzgitter's CFO. No matter: the €8.4 billion company has managed to grow revenues, largely organically, by an annual average of 13% over the past five years, outpacing global steel production growth of 9%. Even more impressively, Salzgitter's pre-tax profits have increased 63% a year over the same period, while last year's return on capital employed of nearly 50% smashed the company's 12% target. Shareholders responded by driving up Salzgitter's share price from €8 at the beginning of 2002 to more than €135 in late October 2007.

Thanks to its stellar performance, Salzgitter ranks in the top ten of a global sample of more than 600 large, listed firms (excluding financial institutions) in terms of total shareholder return (TSR) over the past five years. That's according to a new analysis for CFO Europe by The Boston Consulting Group (BCG). (See "The Value Creators.")

Given its 65% five-year TSR, Salzgitter has had the luxury of piling up cash on an underleveraged balance sheet at a time when investors are pushing many companies to make big payouts to shareholders. Despite doubling its dividend, Salzgitter now holds more than €2 billion on its balance sheet in June. Its debt-to-equity ratio fell from 261% in 2002 to 102% in 2006.

Although the cash cushion is "very comfortable," says Fuhrmann, "from a long-term perspective, we cannot deny that it is too much." While near-term prospects for the company's main line of business remain bright, "these extraordinarily good times will end one day," the CFO says. When that time comes, a large cash pile will ensure that "our ship won't sink when the first storm comes." What's more, the company's spare debt capacity will allow it to snap up less fortunate rivals during a downturn, "when nobody else is interested in acquisitions in steel, in contrast to the situation today," Fuhrmann says. As the company bides its time, a number of important capex projects are under way to bolster organic growth.

Building for long-term growth is, of course, what business schools have been preaching for generations. But conventional wisdom has been changing, says Eric Olsen, senior partner in the Chicago office of BCG, a global business-consulting firm. What was once viewed as a strong balance sheet is increasingly viewed by analysts and investors as a lazy balance sheet — one that under-exploits a company's assets, either by holding too much cash earning low rates of return or by having too little debt. (Olsen says the credit crunch hasn't changed that perception, except perhaps in sectors directly affected by the crunch, such as mortgage lending.)

Yet the cash keeps piling up. Thanks to strong balance sheets and improved cash flow return on investment, corporate profits have soared to record levels, notes BCG. As at Salzgitter, the recent upheaval in the credit markets and the growing fear of an economic slowdown are making companies reluctant to draw down cash reserves anytime soon.

In this environment, investors either hold back on giving a cash-rich company's stock its full due or push for a way to get that money into their own pockets, typically through a share buyback. If management won't pull the trigger, private-equity firms and activist investors are happy to do the job. The challenge, then, is for companies to satisfy their investors' short-term expectations while retaining enough resources to execute long-term strategy — without stumbling into what BCG calls a "cash trap." (See "Avoiding Cash Traps" at the end of this article.)

Opportunity Costs
Many companies have, of course, turned to share buybacks. In the US, through to the end of last year, companies in the S&P 500 had bought back more than $100 billion (€69.5 billion) in shares in each of the past five quarters, nearly double what they were paying out in dividends. There's some logic to that, given that many companies are carrying cash and excess debt capacity equal to 20% to 30% of their market capitalisation. Still, BCG argues that buying back shares doesn't deliver much in the way of long-term value, meaning that corporate executives must still find ways to differentiate their companies from their competitors and demonstrate that they can deliver profitable, above-average growth.

Another top-performer is Terex, a $7.6 billion Connecticut-based manufacturer of construction and mining equipment, boasting a five-year annualised TSR of 49%. The company launched a $200m share buyback programme last year, but against a market capitalisation of $9.3 billion that's not terribly aggressive.

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