A “war chest” is a colloquial term used to describe the reserves of cash that a company sets aside or builds up to seize unexpected opportunities. Typically utilized for acquiring other companies or businesses, a war chest also serves as a safety net during adverse events in uncertain times. These reserves are commonly invested in short-term investments like treasury bills and bank deposits, which are accessible on demand.
Key Takeaways
- A war chest represents a cash reserve that a company maintains to navigate uncertain times or pursue acquisitions.
- War chest funds are usually placed in short-term investments that are readily available.
- An excessively large war chest may be seen as an inefficient use of capital.
- High-profile examples include Apple, where analysts and investors have scrutinized its large cash balances as a poor deployment of capital.
Understanding War Chests
While a well-funded war chest can empower a company to capitalize on strategic opportunities, an excessively growing cash reserve can sometimes be viewed as inefficient capital deployment. Investors may initially overlook this for the promise of higher future benefits. However, if the cash hoard exceeds normal operational requirements significantly, shareholders might demand a portion of it.
In such scenarios, companies might opt to return part of their war chest to shareholders, typically through special dividends, regular dividend increases, share buybacks, or a combination of these measures.
Special Considerations
Companies may also rely on debt, rather than cash reserves, to fund acquisitions or cover unexpected expenses. This practice allows firms to maintain lower cash balances if they have available credit lines. On the other hand, reallocating the war chest to shareholders through special dividends or buybacks is also common.
Types of War Chests
A war chest primarily includes cash and cash equivalents. Nonetheless, more recently, companies have expanded the concept to include intangible assets such as social capital, political capital, and human capital. These assets can prove invaluable during corporate raids or defensive maneuvers against them.
The structure of a war chest can vary significantly depending on the country, industry, and business model of the company. Each war chest is unique.
A related term is the “war room,” a space where core executives gather to devise high-stakes strategies, often utilizing advanced audio, video, and communications technology.
Examples of War Chests
Companies frequently use war chests to fund acquisitions and strategic investments. Monitoring changes in a company’s war chest can provide insights into its near-term strategies and health.
Apple
Apple, for instance, is well-known for its significant cash reserves. As of June 25, 2022, Apple had $27.5 billion in cash on hand, which was a reduction from $35 billion a year earlier. This decrease followed efforts to buy back shares and distribute dividends amid shareholder pressure to utilize excess cash more effectively.
Berkshire Hathaway
Warren Buffett’s Berkshire Hathaway is another notable case. The company had $26.5 billion in cash as of June 30, 2022, down from over $85 billion at the close of 2021. Analysts keep a close eye on Buffett’s cash position, speculating about potential acquisitions. The sharp decrease in cash reflects Berkshire’s aggressive stock purchases, including a significant stake in Occidental Petroleum.
The Purpose of War Chests
Companies amass war chests to support substantial investments or acquisitions when the right opportunities arise. These reserves also function as a protective buffer during economic downturns. With a war chest, a company can strategically time its actions to maximize benefits and fend off hostile takeovers.
Composition of War Chests
A war chest is composed of liquid assets that are quickly accessible, such as cash, cash equivalents, bank deposits, and Treasury bills.
Origin of the Term “War Chest”
The term “war chest” originates from medieval military jargon, referring to an individual’s personal stash of weapons and armor kept in a chest for immediate use in case of conflict.
Related Terms: capital, dividends, share buybacks, treasury bills, cash equivalents, debt financing
References
- Edward Lazear and Michael Gibbs. “Personal Economics for Managers”, Page 92. Wiley, September 11, 2007.
- Harvard Business Review. “The Case for Stock Buybacks”.
- Apple, Inc. “FY22_Q3 10-Q”, Page 3.
- Apple. “Apple Reports Fourth Quarter Results”.
- Berkshire Hathaway. “FY22_Q2 10-Q”, Page 2.
- S&P Global Market Intelligence. “Buffett’s Berkshire Hathaway Is Loading Up on Occidental Petroleum Stock”.
- Economic History Association. “Military Spending Patterns in History”.
