Acquisitions and Tax implications for Overseas Cash

Acquisitions are always interesting and the article below helps to take into account tax implications for companies with large amounts of cash and what happens upon repatriation. It is an excellent description of how to value stocks. Many times it is hard to find out cash position information. Of course you need to know the amounts involved in different countries, as there may be tax effects in those countries to take into account also.

In the past, Brazil, for example, did not allow the money to be repatriated and so companies were stuck with money in the foreign country. Then they had to either invest in the current company, invest in other companies within the country, or wait until the government policies changed.

The article below has been included in it's entirety, as it is too interesting not to be able to read it. Good reading!

Tech Firms Find It's Not Easy Holding Green

By ROLFE WINKLER

If you buy a $1 million house and find $200,000 in the basement when you move in, how much did you really pay for it? That, in a nutshell, is the question facing shareholders in Apple and other mega-cap tech companies.

WSJ's Rolfe Winkler makes a stop on Mean Street to explain the challenges in determining the valuation of companies that hold large cash reserves. AP Photo.

Buying a share of Apple stock for $385, Friday's close, an investor finds it has $87 per share of cash on its balance sheet. Google, Cisco Systems and Microsoft are other tech titans with gargantuan cash piles on their balance sheets. So what's the right way to think about how much investors are paying to own a piece of these companies?

The cash lying on Apple's balance sheet is, in theory, just a bonus shareholders get when they buy the stock. With interest rates near zero, cash adds nearly nothing to earnings. So when measuring a company's valuation, many will simply "back out the cash" to understand a company's value relative to the earnings it generates. In Apple's case, analysts estimate it will earn $34.43 a share in the fiscal year ending next September. Today's price per share is 11 times earnings. If you exclude cash per share, the multiple is just 8.6 times earnings.

 

But it isn't so simple, for Apple or any of the other tech companies noted above. For starters, most of Big Tech's cash is held overseas. In its last financial filing, Apple said two-thirds of its cash is abroad. For Google, it's nearly 50%, and, for Cisco and Microsoft, about 90%. Companies can't return cash to shareholders before they repatriate it. And that incurs a 35% tax liability. So even if investors are to take cash piles at face value, they need to discount the portion held abroad by the tax rate.
Bondholders also have a claim on the company's cash, of course. While Apple has no debt, Cisco, Microsoft and Google do. So, for instance, investors eyeing Cisco's $44.4 billion cash pile should note the company has $16.9 billion of debt, too.

Another reason to discount cash: Companies can waste it on ill-considered acquisitions. Google's proposed $12.5 billion price tag for Motorola Mobility Holdings seems expensive, as does Hewlett-Packard's $10 billion deal for software-maker Autonomy. When those deals were announced, the market capitalizations of Google and H-P each fell more than the cost of their respective acquisitions. It's as if shareholders not only ascribed zero value for the acquired companies but penalized Google and H-P for their lack of discipline.
After its pricey $8.6 billion purchase of Web-telephony company Skype, which makes little money, Microsoft also seems a candidate to have its cash pile discounted.

Apple, meanwhile, has been content to just let its cash accumulate. That could finally change: Apple's new chief executive, Tim Cook, has said he's "not religious about holding cash." So perhaps a dividend is in Apple's future, giving some confidence Apple will act responsibly.

But perhaps the best rule of thumb when analyzing the true value of corporate cash piles: guilty until proven innocent.

Tech Firms Find It's Not Easy Holding Green