Why Apple Has to Borrow $17 Billion
A company sitting on a $150 billion cash pile planning a $17 billion bond issue to buy back its shares? It sounds like a bad joke, and Apple, the company in question, is keenly aware of it.
"We very much appreciate all of the input that so many of our shareholders have provided us on how best to deploy our cash," Apple chief executive Tim Cook said during the recent earnings call, trying hard not to sound sarcastic. He was just about to reveal the expansion of the company's $100 billion buyback program to $130 billion, but, as it later transpired, the cash pile was not to be depleted: Apple would use borrowed funds instead.
Luca Maestri, who will soon take over as Apple's chief financial officer, explained the reason for this strange behavior during the same earnings call. "Thanks to Apple's strong growth and international expansion in recent years we've built substantial offshore cash balances," he said. "To repatriate our foreign cash under current U.S. tax law, we would incur significant tax consequences and we don't believe this would be in the best interest of our shareholders."
Specifically, 88 percent of Apple's cash, or $130 billion, is overseas, and were the company to bring it home, the taxman would claim about a third of it. Last year, when the Securities and Exchange Commission asked Apple about its foreign earnings, the iPhone maker replied that most of it was generated by Irish subsidiaries and "intended to be indefinitely reinvested in operations outside the U.S." If Apple issues debt in Europe, the proceeds could be used for the buyback, while the interest and principal owed to debt investors would be paid out of the Irish cash pile.
Apple's planned mammoth bond issue is not the only large deal motivated at least in part by the overseas cash accumulated by U.S. companies. There's also Pfizer's $98.7 billion bid for U.K.-based AstraZeneca, which would help the U.S. drugmaker put to work the $69 billion accumulated in its foreign subsidiaries. GE's foreign cash, $57 billion, may soon go towards the purchase of the energy business of France's Alstom, unless that deal falls apart.
A year ago, the Wall Street Journal calculated that 60 large U.S. companies, each of which held at least $5 billion offshore in 2011, piled up $166 billion of cash overseas in 2012. GE and Pfizer were at the top of that list. Microsoft, which is acquiring the mobile handset business of Finland's Nokia, was third. That makes it logical to expect large non-U.S. takeover bids from Merck and Johnson & Johnson, fourth and fifth on the list, respectively.
Bloomberg News puts the amount accumulated by multinationals outside the U.S. at $1.95 trillion, up 11.8 percent from a year ago. Moody's, the credit rating agency, has a lower estimate of a mere $947 billion. That money is burning holes in companies' pockets and spurring mergers and acquisitions activity at levels unseen since before the financial crisis. The global M&A market has reached $1.2 trillion in the year to date, with 47 percent of transactions coming in cash.
It is, perhaps, not entirely unwise for the U.S. to have tax rules that force American companies to globalize. It adds to their financial stability, speeds up their growth and increases their access to innovative technology and is, in the end, good for both these companies' U.S. shareholders and for the government. Europe, too, is happy to see the U.S. investment -- with the possible exception of Francois Hollande's socialist government in France, which is grappling with the political unseemliness of letting a company saved from bankruptcy under ex-president Nicolas Sarkozy pass into American hands.
It would, however, be interesting to see where U.S. companies' cash would flow if the U.S. adopted Ireland's 12.5 percent corporate tax rate. Some, including many of the tech leaders such as Google and Facebook, might cling to their "double Irish" and "Dutch sandwich" schemes; others might be tempted to expand at home. As Richard Burton, Ireland's minister for enterprise, once said, "we make no apologies for having a regime that's designed to promote employment in this economy." While the U.S. does have a more global role to play, perhaps it should also be less apologetic about promoting its own growth.
This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.
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Leonid Bershidsky at email@example.com