A literal chest used by the short-lived Company of Scotland in the 1690s. Image Credit: Kim Traynor (CC by SA-3.0)
A war chest refers to reserves of cash set aside by a company in order to take advantage of an unexpected opportunity. This usually takes the form of acquiring other businesses, but war chests can also be used to defend against a hostile takeover or other adverse event. War chests are typically invested in short-term liquid investments, such as treasury bills or bank deposits, so that they can easily be deployed when the time is right. More recently, companies have also included intangibles such as social, political and human capital as part of a greater war chest.
If a company invests too much in its war chest over time, it may receive criticism from shareholders who believe that capital could be deployed more effectively for immediate benefit. In response to a bloated war chest, the company might decide to distribute excess cash to shareholders in the form of a special dividend, an increase in regular dividends, a share buyback or some combination of these methods.
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