When is CAPEX Coming Back?

February 17, 2014
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Since 2008, many companies have stockpiled cash on their balance sheets instead of spending it on upgrading and/or building new facilities or buying new equipment. This of course, is a strategy that can only last so long, as eventually things fall apart and systems grow obsolete.  And yet, six years since the global financial crisis, long lost CAPEX still hasn’t come home. The better question is; will it ever?

Companies are sitting on piles of cash ($2.8 trillion to be exact). To be fair, cash on a balance sheet isn’t a bad thing—after all that cash may be stored up for a rainy day, used to buy a competitor or purchase outstanding shares on the market.  Even better, cash could be used for capital expenditures (CAPEX) such as upgrading ancient IT equipment or improving manufacturing facilities.

While enterprises clutch the purse strings, investors are pressuring them to spend. A Bank of America/Merrill Lynch survey showed 58% of fund managers want companies to spend their cash on CAPEX, as opposed to giving money back to shareholders. Regardless, of whether monies are used for CAPEX, share buybacks or the like, investors want companies to spend, and spend now.

Exacerbating the issue, the Financial Times reports cash hoarding is blamed for a lack-luster global economy. After all, one person’s income is often based on another person’s (or corporation’s) spending. In other words, freeing up all that unspent cash could lead to a lot more global economic growth.

Boston fund manager Jim Swanson says that while companies have been right to store up cash—because of economic uncertainty—they’ve taken it too far. He says he’d prefer the cash to go toward refreshing a company’s “aging IT” department.

There are good business cases to spend that cash now. From an IT perspective, plenty of assets have most likely been depreciated past the three year mark and are nearing the end of useful life. And from a facilities and equipment point of view, it may make sense to examine possible productivity improvements from advanced robotics, or even upgrade onsite security systems to prevent un-authorized entry.

Perhaps we’re seeing a sea-change, where CAPEX is on permanent vacation. The rise of cloud computing, for instance, essentially means that information technology can be purchased from another provider on a monthly basis and funded from operating expenses.  This method of payment undoubtedly allows companies to take advantage of technology improvements with fewer obsolescence risks.

At some point in the near future—and likely through activist and investor pressure—companies will be forced to put their cash to work. And while some analysts are bullish on the global economy because of pent up demand, others are more reserved.  So when will CAPEX come back? It’s quite possible that “flat CAPEX” spending is the new normal.

 Questions:

  • Should companies be hoarding or spending their cash?  If spending, what needs the most attention?
  • What trends—besides virtualization—may be contributing to less spending on information technology?
  • Is the move to OPEX instead of CAPEX for IT purchases an “economic revolution”?

 I’d love to hear your thoughts!