Overseas Corporate Cash Fuels a Shopping Spree

Money sheltered from U.S. taxes makes for cheaper acquisitions

U.S. companies such as General Electric and Microsoft are using cash parked overseas to snap up foreign companies at more than double last year’s pace. Through the first seven months of 2011, there have been about $174 billion in deals in which U.S. companies bought foreign assets, nearly matching the total for all of 2010. “More U.S. companies are scouting the universe for an asset or a company they want and financing it with offshore cash,” says Marc Zenner, co-head of JPMorgan Chase’s corporate finance advisory group.

The pickup in dealmaking overseas comes as companies including Apple, Cisco Systems, and Pfizer push Congress for a holiday from taxes on cash held overseas that U.S. companies bring home. Under current tax law the federal income tax on most overseas earnings can be deferred indefinitely. When that cash is repatriated, it’s taxed at the federal and state combined corporate rate of 39.5 percent, minus credits for foreign income taxes paid. Statutory corporate tax rates for America’s main competitors hover around 30 percent. Zenner estimates that nonfinancial companies in Standard & Poor’s 500-stock index hold 40 percent to 60 percent of their $1.3 trillion of cash overseas—or as much as $780 billion.

In March, GE agreed to spend $3.2 billion for a 90 percent stake in Converteam, a French energy infrastructure firm. That same month, the U.S. company paid about $1.4 billion for British oil-services company Wellstream Holdings. Both deals tapped GE’s overseas cash stockpile, according to people briefed on the deals, who declined to be identified because the details of the transaction aren’t public. About $18 billion of GE’s $79 billion of cash and cash equivalents sat overseas at the end of last year, according to the company.

Making acquisitions with overseas money lowers the effective cost of the purchase—which may lead acquirers to pay more than they would have for a similar purchase, analysts say. Stanley Black & Decker offered $1.2 billion on June 27 for Niscayah Group, the Swedish security firm. Microsoft said it used $8.5 billion of offshore cash to acquire Luxembourg-based Internet phone service Skype Technologies in May. Both Stanley and Microsoft disclosed that they were using overseas cash out of concern that shareholders and analysts might complain they had overpaid for their deals, say two people familiar with the transactions.

Overseas deals may accelerate as U.S. companies tap offshore cash, in part because some companies have seen their stocks jump when they announce mergers or acquisitions. “Investors have broadly embraced M&A strategies this year,” says Aryeh B. Bourkoff, head of investment banking for the Americas at UBS, which advised Joy Global on its $584 million purchase of a stake in China’s International Mining Machinery Holdings. Joy Global’s shares rose 0.6 percent on the day the deal was announced.

Technology companies have amassed some of the biggest offshore cash piles, according to Zenner, who estimates that Apple has about $47.6 billion overseas; Cisco has $38.8 billion, Oracle $20.4 billion, and Google $18.8 billion. Tech companies have also been the most vocal advocates for a tax holiday. Cisco Chief Executive Officer John T. Chambers is leading the push for the tax holiday, under which profits could return to the U.S. at a discounted 5.25 percent rate. The Obama Administration has so far resisted such a bill unless it were to be part of a comprehensive tax overhaul.


    The bottom line: Using some of their $780 billion in overseas cash, U.S. companies doubled foreign acquisitions this year through July.

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