European companies are hoarding more than three times the cashthey held a decade ago as the region heads for a second year ofrecession, putting them at risk of losing out to U.S. rivalsboosting acquisitions and investment.

Cash holdings at the 265 European companies in the Stoxx Europe600 Index, excluding banks and insurers, to have reported 2012results totalled $475 billion at the end of last year, according todata compiled by Bloomberg. That compares with $136 billion in 2002and is 14 percent more than in 2011. Siemens AG, Vodafone Group Plcand Total SA are among nine companies that each held more than $10billion.

“Many European companies are taking a conservative view withrespect to their capital structure and keeping meaningful cashpositions,” said Francois-Xavier de Mallmann, head of Europeaninvestment banking services at Goldman Sachs Group Inc. in London.“They find it challenging to predict the combined impact of higherunemployment, higher taxes and lower public spending on consumerdemand and on their top line.”

The euro area will shrink for two straight years for the firsttime since the common currency was introduced, the EuropeanCommission predicted on Feb. 22, scrapping an earlier growthforecast. Western European companies have announced $50 billion ofacquisitions so far this year, almost half the total of theyear-ago period, while purchases by U.S. companies almost doubledto $184 billion, Bloomberg data show.

Daimler AG, whose cash and cash equivalents rose by 15 percentlast year to 11 billion euros ($15 billion) at the end of December,encapsulated the mood in European boardrooms.

While the company will roll out 13 new models with nopredecessor in the next eight years, the maker of Mercedes-Benzvehicles doesn't plan any “major” acquisitions, according to ChiefFinancial Officer Bodo Uebber.

“The liquidity is a sedative,” Uebber said Feb. 7. “We want tobe prepared for uncertain times.”

To preserve cash, European companies are also limiting payoutsto shareholders. The dividend yield of companies in the StoxxEurope 600, excluding financials, will probably stagnate at 3.45percent this year, according to analyst estimates compiled byBloomberg.

Deutsche Lufthansa AG on Feb. 19 said it plans to suspend itsdividend for the first time since 2010 to save cash as the Germanairline rejuvenates the fleet and pushes ahead with its mostambitious cost-savings program to date. Nokia Oyj last month saidit will omit a dividend for the first time in at least 143years.

Wary Europeans

Other firms that cancelled or reduced dividends in recent monthsinclude phone companies Telecom Italia SpA, Royal KPN NV andTelefonica SA as well as car companies PSA Peugeot Citroen andFaurecia.

“Companies are wary,” said Nils Ernst, a Frankfurt-based fundmanager at DWS Investments, which oversees $335 billion in assets.“If you raise the dividend you have to be certain that in the nextfive to 10 years you don't have to cut it.”

Switzerland's Nestle SA, the world's largest food company, plansto maintain capital expenditure in 2013 at the same level as in2012, Chief Financial Officer Wan Ling Martello said this month.The operating cash flow of the maker of Moevenpick ice cream, whichlast year agreed to buy Pfizer Inc.'s infant- nutrition businessfor $11.9 billion to expand in markets such as China, surged 55percent in 2012 to 15.8 billion Swiss francs ($17 billion).

With many of Europe's biggest companies reluctant to spend theircash on deals this year, U.S. companies may choose to pounceinstead. John Malone's Liberty Global Inc., based in Englewood,Colorado, took advantage of low financing costs and this monthagreed to buy U.K. cable-TV provider Virgin Media Inc. for $16billion.

“There are a lot of acquisition targets out there,” saidMatthias Born, a Frankfurt-based fund manager at Allianz GlobalInvestors in Frankfurt, which manages about 300 billion euros.“Consumer, chemicals and parts of industrials are areas where thereshould be attractive targets in Europe.”

Deutsche Bank AG analysts Fadi Chamsy and Sascha Levitt in aFeb. 14 note identified Dutch cable company Ziggo NV, Britishairport-security scanner company Smiths Group Plc, German fragrancemaker Symrise AG, French car-parts manufacturer Faurecia, Belgianretailer Delhaize Group SA, Switzerland's Nobel Biocare Holding AGand U.K. fashion brand Burberry Group Plc as potential acquisitiontargets.

Slim's Record

The economic outlook, though, may make them wary. Carlos Slim'sinvestments in Europe highlight the risks for foreign companiesseizing on cheap prey in the region.

America Movil SAB, the Mexico City-based mobile-phone operatorbacked by billionaire Slim, last year built up a 28 percent stakein KPN. Since then, the investment has lost more than half itsvalue and KPN is selling stock to raise cash.

While Europe's biggest companies are reluctant to buy localrivals, some of them are spending money on acquisitions to tapgrowth in emerging markets.

Unilever NV, the world's second-largest consumer-goods maker,will look for acquisitions between 1 billion euros and 2 billioneuros, Chief Financial Officer Jean-Marc Huet said last month.Recent deals of the maker of Dove soap include the 2011 pickup ofRussian skincare maker OAO Concern Kalina, and the $3.7 billionpurchase of U.S. haircare company Alberto Culver the previousyear.

While Unilever's free cash flow rose to 4.33 billion euros lastyear, the most since 1999, the company is still cautious to spendbig. Unilever is looking for “bolt-on” acquisitions to expandexisting operations and a larger purchase would only be “fine aslong as it's not distracting,” Huet said.

The build-up of cash also makes European companies moreattractive for leveraged buy-outs, according to DWS's Ernst.

“In terms of targeting companies which are cash-generating andhave big cash piles on the balance sheet: I am quite confident thatover the next twelve months we will see more deals in thatdirection,” he said.

Bloomberg News

Copyright 2018 Bloomberg. All rightsreserved. This material may not be published, broadcast, rewritten,or redistributed.