Canadian companies should be spending their excess cash on mergers and acquisitions in an effort to shore up the country’s future, suggest RBC economists in a new report.

“The impressive state of corporate finances combined with challenges to Canada’s competitiveness make for a rare window of opportunity to pursue more investment and R&D activity, but also for mergers and acquisitions to be combined with public policy changes geared towards reducing growth barriers, and unlocking value in companies through a multi-stakeholder approach,” it says.

RBC notes that the list of challenges to Canadian firms includes the higher dollar, high energy prices, technological change and globalization. “The evidence on how poorly these challenges are being addressed starts — but does not end — with a weak long-term standing on productivity growth, continued under-investment in equipment and a poor track record on R&D spending,” it says.

“The poor response to such challenges is reflected in the state of the nation’s corporate finances,” it adds. “Yes, corporate profits are strong, but the gains are not being disseminated through rising living standards in the way that only sustainable productivity growth can achieve.” RBC allows that investment spending is on the rise, “but Canada has under-invested for so long that it has a big hole out of which to climb,” it notes. “Further, many of our firms are high-cost small producers that are not well positioned for the global economy, and, across many industries, capital structures are being very conservatively managed.”

“Too many industries are playing it too safely with their debt-equity ratios, and companies are stockpiling idle cash at a record pace instead of using it to enhance their competitiveness,” it adds. “Ironically, because investment plans are so far behind the profit cycle, what they now hold in cash is way beyond anything needed to fund even the strongest of plans for investment or R&D spending, or to provide for a rainy day, and it would not make sense to use cash for long-term unfunded pension liabilities.”

Instead, companies should be looking to M&A to unlock value, RBC counsels. “Shareholders do not pay managers to hoard cash, have underleveraged balance sheets, and fret about risks to the point of stagnating. They pay management to have informed, aggressive approaches to meeting challenges and fleshing out opportunities,” it says. “In the absence of such plans, or far higher shareholder disbursements, M&As are the disciplinary way of redeploying excess cash and addressing management issues.”

“Policymakers also have a role to play and cannot simply absolve themselves of any responsibility,” RBC adds. It calls on them to reduce barriers to growth such as very high taxes, profit insensitive taxes, regulatory uncertainty, skilled labour shortages due to weak education and immigration policies, aging infrastructure and poor energy policies.

“These issues are also relevant to financial firms since their excess capital is primarily a symptom of weak business lending opportunities in recent years and massive client liquidity held on deposit,” it adds.