Soon after the financial crisis began in 2008, companies shifted attention from finance to operations. Finance had fallen out of favour: risk capital dried up, asset prices collapsed and capital sought safe havens like US Treasurys. The crisis also ushered in a period of tepid growth undermined by persistent economic uncertainty. This limited the financial options companies could use to juice returns, so they focused on investing in operations to create efficiencies or fight for market share. In the years following the crisis, the "operations yield" - the return from investing in operations - outstripped the "financial yield" - the return from turning a business into a financial plaything.
Since the start of the crisis, central banks have pumped a lot of money into financial markets, principally by buying up debt issued by governments and financial assets held by banks. This was supposed to spur business activity, particularly lending and investing, by driving down the cost of both debt (lower lending rates) and equity (motivating capital to seek higher returns by pursuing riskier investments).
Whether lending and investing have increased as a result of these policies is debatable. One thing they have done is encourage companies to change their capital structure: low interest rates have made debt cheaper to issue than equity, so companies have been busy selling bonds and buying back their own stock. There are financial benefits to doing this, namely lowering capital costs. It benefits the equity financiers by concentrating ownership of the company in fewer hands. But beyond reducing the hurdle rate for investments by a few basis points - and not very much at that given low interest rates - this doesn't provide any operational benefit.
What's not debatable is that it's brought about a return of financial engineering. CLOs and hybrids are back. Messers Einhorn and Buffet are engineering what amount to ATM withdrawals through preferred share offerings from Apple and Heinz, respectively. The OfficeMax / Office Depot merger is addition through subtraction: projected synergies exceed the combined market cap of the two firms.
When financing yields are higher than operating yields, business operations take a back seat to financial philandering. Consider Dell Computer. Dell's business lines are either in decline (services) or violently competitive (PCs and servers). Does it matter whether Dell is funded with public or private money? Will being a private firm make Michael Dell better able to do anything he cannot do today? It is hard to see how it does. But it does let him play tax arbitrage.
This suggests a bearish environment for investment in operations. The shift to debt in favour of equity, the rise in share buybacks, dividend payouts and M&A suggest that companies have run out of ideas for how to invest in themselves. Cash flow that would otherwise be channeled into the business is betrothed to financiers instead. Debt yields are kept low and roll-overs made easier by stable and consistent cash flows, and equity easier to raise when cash flows from operations are both strong and consistent. This compels executives to set a "steady as she goes" agenda - not an aggressive investment agenda - for business operations.
A reduction in business investment is not particularly good news for tech firms selling hardware, software or services to companies. But it's not all bad news. Rewarding financiers by a starving business for investment makes a company sclerotic. That clears the way for innovators to disrupt and grow quickly. But until those innovators rise up, finance is positioned to stymie - not facilitate - business innovation.
