Why No Outrage Over Apple's Big Bond Deal?
There are a couple of widely held misconceptions about Apple Inc.'s mountain of cash that I want to correct, for precision's sake, before moving on to some broader points about why anyone who isn't an Apple investor should care about the company's next big bond deal.
First, Apple doesn't have $150 billion of cash, despite what often is reported in the news media. Its latest balance sheet showed about $19 billion of cash and cash equivalents. It also showed about $131 billion of marketable securities, which include corporate and government bonds as well as mortgage-backed securities. It's true that those assets can easily be sold for cash. But, for the record, bonds aren't the same as cash. If they were, Apple would label them as cash on its despite.
Second, although it often has been said that the vast majority of Apple's cash is held overseas, this also is in need of some clarification. Some of the money that hasn't been repatriated for tax purposes actually is held in the U.S. This wasn't widely known until about a year ago, when the Senate Permanent Subcommittee on Investigations held a hearing on Apple's many clever strategies for minimizing taxes.
One Apple subsidiary that was spotlighted at the hearing, Apple Operations International, accounted for 30 percent of Apple's worldwide profit from 2009 to 2011. It's incorporated in Ireland, but managed and controlled in the U.S. Apple set up Apple Operations so it wouldn't be a resident of either country, or any country, for tax purposes. So Apple Operations paid no corporate-income taxes. As the Senate panel's report last year said, "the assets themselves are held in bank accounts in New York."
OK, with all of that now out of the way, let's move on now to the matter of Apple's hotly anticipated bond deal, which could top $17 billion. In a simpler world, Apple would pay dividends and repurchase its shares using money it has on hand. Doing that, however, would trigger a tax hit in the U.S. So Apple, once again, will be borrowing money so it can redistribute it to shareholders.
It did this a year ago, too, borrowing $17 billion in what, at the time, was the largest corporate bond offering ever. (That record was topped by Verizon Communications Inc.'s $49 billion bond sale last September.) The interest payments on the bonds will be tax-deductible. All of this works out nicely for Apple shareholders. Ordinary Americans can only dream of being able to enjoy such wondrous tax efficiency.
As Floyd Norris of the New York Times wrote in a column about a year ago: "Isn't that nice of the government? Borrow money to avoid paying taxes, and reduce your tax bill even further." He also posed this question: "Could this become the incident that brings on public outrage over our inequitable corporate tax system?"
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