On paper, Apple has no reason to borrow. Last time it issued bonds was in 1996, when it flirted with bankruptcy and absolutely had to get its hands on some moolah. After Steve Jobs returned in 1997, Apple wisely stayed away from Wall Street and did its own thing. But that era is over. And a new era is dawning upon the icon: Wall-Street engineering.
Apple sat on $144.7 billion in cash and marketable securities at the end of the quarter, yet it announced last Tuesday that it would issue bonds to help pay for $100 billion in dividends and stock buy-backs to be spread over three years – surely not to please some hedge fund managers who, after having gotten stuck in the stock on the way down, had been relentlessly hammering on the company, trying to get it to unleash a torrent of cash.
Now Goldman Sachs has apparently been anointed by Apple to lead a $17-billion bond offering, in six parts with maturities ranging from three to 30 years, according to Bloomberg’s “person familiar with the offering.” Wall Street will certainly come out on top, now that it has gotten its foot in the door. Bond investors will earn a measly yield that will most likely be less than inflation over time, and Apple stockholders will watch their equity get replaced by debt.
These “people familiar with the decision” indicated to Bloomberg that CEO Tim Cook hired Goldman Sachs last year to figure out what to do with all this cash and “to help the company improve transparency and governance.” Hiring Goldman Sachs to improve “transparency?” That must have been an insider joke by the “people familiar with the decision.”
Apple stockholders are antsy. Their sacrosanct investment, instead of hitting a market valuation higher than that of Exxon, whooshed from $705 a share to $400 in seven months. “Very frustrating to all of us,” is what Cook called this phenomenon during the earnings call.
There were some challenges. The bottom fell out of the PC business. In the first quarter, worldwide shipments plunged 14%; Apple’s 2% decline was comparatively benign. More ominously, in the still red-hot smartphone market, where shipments soared 36% in the first quarter to 209.5 million units, the other kids on the block ate Apple’s lunch. Shipments edged up 6.6% year over year, to 37.4 million units, the slowest growth rate in recorded iPhone history, and market share withered to 18%, from 23% a year ago. It had gotten clobbered by Samsung whose smartphone shipments jumped 56% to 69.4 million units, and whose market share climbed to 33%.
To make us feel better, Cook promised “flat revenues year over year for the June quarter along with a slight sequential decline in gross margins.” He brimmed with optimism. After all, Wall-Street engineering would make up the difference.
Last August, Apple started paying dividends, and in October, it started buying back shares. $10 billion so far, of the $45 billion allocated for those purposes. Now the company would jack up the “capital return program” to $100 billion by 2015, so $30 billion a year, most of it through share buy-backs. To pay for it, Apple would “access the debt markets,” Cook said.
The problem: of the $144.7 billion in cash and marketable securities, “over $102 billion” were “offshore,” CFO Peter Oppenheimer explained. They’re tucked away in low-tax jurisdictions, scattered around the globe, perhaps in Ireland, Luxembourg, and other places, in mailbox companies and real outfits, through which Apple routes its transactions to generate income there, rather than in the higher-tax jurisdictions where Apple sells the majority of its products – including the US.
While that $102 billion has been sheltered from US or other taxes, it turns out to be useless: “repatriating this cash would result in significant tax consequences under current US tax law,” Oppenheimer confessed. Hence, Apple would “fund the capital return program from existing domestic cash, future cash generated in the US, and from borrowing in the US.”
The government has been bleeding red ink and owes a mind-boggling $16.76 trillion. Payroll taxes have gone up, and people are getting squeezed in other ways. But rather than paying some taxes on repatriating the minimum needed to fill in what its operating cash flow in the US can’t cover, Apple will let the cash rot in some island nation and borrow in the US to pay for dividends and share buybacks.
You can’t blame Apple for this absurdity. It’s following in the footsteps of many US corporations that fund dividends and share buy-backs with borrowed money, rather than using the cash that is stuck in some offshore tax haven. They’re doing what the corporate tax dodge code – and by extension, Congress – encourages them to do; and what the Fed, in its infinite wisdom, through its zero-interest-rate policy enables them to do.
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