At a time when bond investors are begging companies to borrow money cheap and tax-minimizing maneuvers are the rage, Apple Inc. (AAPL) played to the script this week by issuing $12 billion in low-cost debt to fund its stock buyback rather than use some of the $150 billion in cash it has stashed overseas.
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Apple’s second eagerly bought bond deal in the past year allows it to avoid incurring U.S. taxes on foreign-stored cash brought home for domestic use.
It fits with Pfizer Inc.’s (PFE) bid for AstraZeneca PLC (AZN), motivated in part by a plan to move the merged company headquarters to a low-tax U.K. jurisdiction. And in their effort to acquire Allergan Inc. (AGN), Bill Ackman and Valiant Pharmaceuticals International (VRX) boast of the advantages of Valeant’s gentler-taxing Canadian home base.
So are the board and management of eBay Inc. (EBAY) clueless or crazy for electing to trigger a $3 billion non-tax charge for a potential future tax bill should it decide to repatriate $9 billion of its overseas cash, rather than tap the pliant bond market for any immediate domestic spending needs?
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Maybe not. As I point out to Yahoo Finance Editor-in-Chief Aaron Task in the attached video, it is not as if the market was giving eBay full credit for that cash trove in its stock valuation.
The company, with a $66.5 billion stock-market capitalization after today’s 5% decline in the shares, is valued at 17 times expected 2014 earnings, a prosaic multiple for a still-growing technology blue chip. And any analyst who did back out net cash for the purposes of valuing eBay would properly have tax-adjusted it anyway.
While Wall Street was confused by the tax charge, it’s hard to state for sure that it has fueled the selloff in eBay shares today, which is more easily attributable to the company’s soft guidance on the rest of the year’s results and some concerns about the strength of the core marketplace e-commerce business.
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The company points out that it has made a number of U.S. acquisitions and suggested more were on the way, so having ample cash ammunition here and ready could come in handy. It has $3.8 billion left on its buyback plan and before this move only $2.2 billion in domestic cash, says UBS. So the extra $6 billion in repatriated cash adds to CEO John Donahoe’s financial flexibility.
More broadly, though, this could represent a tacit admission that any easing of U.S. tax treatment of non-U.S. cash –- a major lobbying point of some tech-industry leaders in recent years –- appears unlikely at a time of heightened anxiety about wealth inequality.
There has always been some hope in Silicon Valley for another “tax holiday” allowing cash repatriation free of taxes, something that was tried in 2004. While companies were asked to show they used the money to hire or invest in U.S. expansion, there is little lasting evidence that it boosted the economy much back then.
Why didn’t eBay just borrow the money, as Apple did? There is no way to know just yet. eBay already has $4.4 billion in debt on its books. Rather than borrow $6 billion and pay 3% to 4% a year on it for several years, it simply changed the accounting treatment of the overseas cash. If it does grab at the cash at once it will pay what amounts to 33% deferred tax on many years worth of accumulated profits.
Does eBay have a specific, imminent use in mind for the cash? It says no. Does the continued presence of founder Pierre Omidyar, the philanthropist owner of 8% of the company, make eBay more likely to appear a public-spirited corporate citizen? Who knows, but there is no indication this is a factor.
Perhaps the crazy thing is not so much eBay’s decision, but the fact that in the face of U.S. tax law, so many companies have made tax-minimization a key business objective that everyone is alarmed when a big corporation considers voluntarily paying what it owes.
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