Bladder Theory by Hugh Liedtke
I came across Bladder Theory when I read Peter Lynch’s book “One Up on Wall Street”. Its an amazing book about the stock market and is very easy to understand for the advanced-beginner/competent investor, who wants to learn more about the stock market.
Hugh Liedtke was an American petroleum executive who is famously known for being the CEO of Pennzoil and leading to them to a court victory over Texaco. He came up with Bladder Theory. Bladder Theory, basically says that a company with to much cash can either do two things. One of them is a good thing and the other one is pretty risky.
Let me talk about the good thing first. Lets say a company has a lot of cash and it does not know what to do with it. The right thing to do over here would be to pay it off to the shareholders as dividends, special dividends or use it for share buybacks. This can help in increasing the wealth of the shareholders, which is one of the main objectives of every company. This is a better option than letting the cash sit idle because that would lead to lower returns to the shareholders. The reason for this is that that cash could be invested or used for a better purpose than be used for nothing and let inflation eat it away.
Now the risky option. When a company accumulates a lot of cash, it pressurizes the managers to use that money in some way. It might not be the best thing to do. The board of the company may go on to expand their business, which could be a good thing, given that the demand for their products and services is rising or else its basically a waste of money. They may also acquire other companies and businesses to diversify or di-worsify (Peter Lynch uses this word in his book). Diversifying/acquisition is a good thing as long a company can handle it and lead that acquisition to earn more profits. If not then, its just a waste of money or di-worsification. The company could have distributed it as dividends instead. If a company can manage the acquired company or their diversification plan in a profitable way the everyone is happy. Everyone becomes rich. But most of the times, this isn’t the case as it can be really hard to keep that business maintain the amount of profit it earns or increase it every year.
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