Wall-Street Engineering Hones In On Apple’s "Offshore" Cash

testosteronepit's picture


Wolf Richter   www.testosteronepit.com   www.amazon.com/author/wolfrichter

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.

The Eagles got it right with Hotel California: “You can check out any time you like, but you can never leave!” The San Jose City Council, facing huge budget deficits, tried to terminate life-time pension benefits for Council members. Turns out, ending wildly expensive benefits may be wildly more expensive than staying in the plan. Read.... California Pension Fund Is Hotel California.

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Wed, 05/01/2013 - 11:46 | 3518170 dirtbagger
dirtbagger's picture

Forget the Middle East.  It's about time we put our Marines and military to good use and invade the Caymans and all of other international cash havens.  All of the world banking institutions are stealing, lets join the party. 

Wed, 05/01/2013 - 11:05 | 3517902 RaceToTheBottom
RaceToTheBottom's picture

Yet if American citizens tried the same, even throwing their citizenship to the wind, we are hit on the noggin

Wed, 05/01/2013 - 09:12 | 3517361 Urban Roman
Urban Roman's picture

They were flirting with bankruptcy in 1996, but now they're ready to climb on and start humping.

Wed, 05/01/2013 - 08:42 | 3517262 resurger
resurger's picture

excellent analysis tes

Wed, 05/01/2013 - 06:59 | 3517073 Mototard at Large
Mototard at Large's picture

As soon as the control of a company passes from it engineer/designers/producers and over to the accountants/MBAs/financialists, it is over.

In five years, the CEO of Apple will be lined up in Washington with GM, Chrysler, Bank of America and others looking for a bailout.  He will argue that Apple is an iconic American brand and the jobs have to be saved, even if the only jobs they have in America are all low paid store staff and a few rich execs in California.

Apple borrowing money with GS involved?  Steve Jobs is rolling in his grave.


Wed, 05/01/2013 - 06:44 | 3517067 skippy9
skippy9's picture

Are you all forgetting we live in the age of GLOBALIZATION?

Wed, 05/01/2013 - 05:49 | 3517017 Sandmann
Sandmann's picture

Why can't it float Offshore Bonds against the cash or does it simply want the US Treasury to subsidise the Debt Interest ?

Wed, 05/01/2013 - 02:19 | 3516882 dunce
dunce's picture

Capital may be unused or misused, but it is never "useless" as stated inthis piece.

Wed, 05/01/2013 - 01:28 | 3516827 WTFUD
WTFUD's picture

Shipping jobs and robbing domestic & international "sales" markets of much needed incomes!
This vulgar behaviour in these times of ' we are all in this together' austerity i am certain will not go unpunished by existing or potential customers and just like FaceFuckBook who believe that their incestuous relationship with WallyStreet will reap dividends are Clueless to the real harm and credibility long term.
It will be a long time or never when the youth have two cents to rub together in US/Europe and CrApple will not be the must have item even with a 50% drop in price.

Tue, 04/30/2013 - 23:11 | 3516549 Stuck on Zero
Stuck on Zero's picture

Apple is probably earning 5% on its overseas cash.  It's probably also in a currency that is appreciating against the dollar.  It can borrow operating money here at 2% in a falling currency.  I think they're smart.


Wed, 05/01/2013 - 09:49 | 3517542 Kayman
Kayman's picture

Good for Apple, a disaster for the country. Myopia gone viral.

Tue, 04/30/2013 - 22:43 | 3516452 newworldorder
newworldorder's picture

One more indication that the financial wizards that run America have been given lifetime immunity via the politiciians and the tax code.

There are no problems with, $16+ tirllion deficits, a liveral tax code for large corporations, our unemployment numbers, housing, globalist trade, wars, etc. It's all good. No problems that cant be fixed, if only we could elect more democrats/republicans/conservatives/liberals.

The majority must believe that we can be saved from our own folly. All we need is a little tweaking here and there and problems solved.


Tue, 04/30/2013 - 22:34 | 3516422 moneymutt
moneymutt's picture

All those profits they made using Foxconn cheap labor is just wasted...in prison.

Unlike some industries with tight margins on everything, Apple could still make big profits if they paid labor decent wages, made domestically. But stockowners insist on max profit , so they hire Chinese at cheaper rates than almost any other company, and dodge taxes.

Tue, 04/30/2013 - 22:37 | 3516421 moneymutt
moneymutt's picture

All those profits they made using Foxconn cheap labor is just wasted...in prison.

Unlike some industries with tight margins on everything, Apple could still make big profits if they paid labor decent wages, made domestically. But stockowners insist on max profit , so they hire Chinese at cheaper rates than almost any other company, and dodge taxes.

Wed, 05/01/2013 - 03:33 | 3516926 theliberalliberal
theliberalliberal's picture

when a guy gets an oz of weed,  he'll smoke joints and put them out half way through,  kick crumbs onto the floor and give it away to strangers to be seen as cool.

when that bag gets low,  he's on his hands and knees scrapping those crumbs back off the floor,  scrapping the resin out of the pipe etc.

If he was more carefull with it when he had a lot,  he wouldnt be smoking 50% belly button lint that also got scrapped of the floor.


Just because you are making a good margin on a product now,  doesnt mean you should be letting your suppliers (i.e. labour in this instance) overcharge you.  Are they going to give you a discount when times are tough for you?

What obligation does Apple have to give Americans jobs over anybody else.

Dont chinese have a right to jobs too?





Wed, 05/01/2013 - 09:48 | 3517528 Kayman
Kayman's picture

"What obligation does Apple have to give Americans jobs over anybody else."

The skull-cracking club that America has, but never uses, is access to the U.S. market. You want access to the U.S. market, pay your taxes. Period.

Wed, 05/01/2013 - 08:07 | 3517185 BurningFuld
BurningFuld's picture

I'm guessing you shop at Walmart.

Tue, 04/30/2013 - 21:34 | 3516242 Gromit
Gromit's picture

Just bring the money home and pay taxes like everyone else.

Tue, 04/30/2013 - 19:50 | 3515964 FieldingMellish
FieldingMellish's picture

Please don't call it engineering. It sullies the applied sciences to be associated with Wall Street.

Tue, 04/30/2013 - 19:54 | 3515958 Coldfire
Coldfire's picture

This Tim Cook fellow is turning out to be quite a disappointment.

Wed, 05/01/2013 - 02:15 | 3516879 fourchan
fourchan's picture

hes letting the vampire squid "think different."

Tue, 04/30/2013 - 19:41 | 3515936 are we there yet
are we there yet's picture

Irony is the US tax code is the only one in the world that taxes world wide on an individuals income, but not a corporations income. Another irony is that today in peacetime the percent of our economy that is the federal government is roughly equal to WWII, except there is no plan to reduce the size of governemt.

Wed, 05/01/2013 - 02:39 | 3516894 dunce
dunce's picture

A corporation can be nationalized but it can not be captured, especially one like Apple. The real assets walk out the door every day and even if they come back in the morning they can choose not to produce. Some political hack can call some shots but will only get misfires. What computer innovations came out of the USSR? Can you imagine Jobs or Gates as a bureaucrat? Is it not possible for corporations with large foreign operations to split the company into two or more independent units? Exxon gets 60+ % of its profits from overseas. Maybe they might pay fewer taxes as two companies.

Tue, 04/30/2013 - 19:31 | 3515905 babylon15
babylon15's picture

This is why there is no inflation.  The money goes into a black hole.  The black hole is anywhere outside the US where it can never return.  You can print all the money you want, and lend one quadrillion dollars to Apple, and as long as it doesn't enter the country, there won't be inflation here or there or anywhere.

Wed, 05/01/2013 - 02:18 | 3516881 fourchan
fourchan's picture

we have exported our inflation (wage, the only kind the fed thinks about) along with our jobs to the slave nations forever.

Tue, 04/30/2013 - 19:25 | 3515886 q99x2
q99x2's picture

Right there was someone on the planet stupid enough to hire GS to help them with their money. There is no human that F'kn dumb. You've got to be kidding me.

Tue, 04/30/2013 - 18:33 | 3515696 TheMuppet
TheMuppet's picture

What a business model:

- wage arbitrage cheap Chinese labor;

- tax arbitrage hapless U.S. taxpayers, including Apple's own salariat.  Someone should tell them that they pay for Apple's offshoring - that'll wipe the snark off their faces.

Tue, 04/30/2013 - 18:27 | 3515682 Spectre
Spectre's picture

Funny how Corporate cash parking(avoiding income) is okay, but personal parking is  crime.  How Fucdup.

Tue, 04/30/2013 - 18:02 | 3515635 CEOoftheSOFA
CEOoftheSOFA's picture

Good article. Just don't refer to what the Squid does as "Engineering".

CEO of the Sofa, PE

Tue, 04/30/2013 - 18:05 | 3515634 CEOoftheSOFA
CEOoftheSOFA's picture

Good article. Just don't refer to what the Squid does as "Engineering".

CEO of the Sofa, PE

Tue, 04/30/2013 - 17:21 | 3515518 theprofromdover
theprofromdover's picture

What idiocy. They let the Squid in.

They could have sold them bonds in the stores for no commission.

Any number of acolytes would have bought pretty certificates.

Tue, 04/30/2013 - 16:08 | 3515224 andrewp111
andrewp111's picture

Is there any way for AAPL to use that offshore cash to pay its debts without incurring US tax? What if they sell most of the bonds in Japan or Ireland?

Tue, 04/30/2013 - 16:22 | 3515277 michigan independant
michigan independant's picture

sdr for the one percent, so relax, they love you to death.

Tue, 04/30/2013 - 17:18 | 3515505 OpenThePodBayDoorHAL
OpenThePodBayDoorHAL's picture

So this is the hope for the future of America's economy? 60,000 snarky marketing types and designers working here, and 1 million suicidal Chinese fingers assembling the fiddly stuff in sweatshops abroad? Then call in Wall street to avoid paying any taxes?

AAPL = globalist anti-American 1% scam.

Wed, 05/01/2013 - 08:06 | 3517173 BurningFuld
BurningFuld's picture

I Fucking hate Apple. FYI

Tue, 04/30/2013 - 16:10 | 3515219 sethstorm
sethstorm's picture

How about just using existing law to make those jurisdictions have a "very bad day" all at once in the US's favor?  The majority of those jurisdictions are small enough to have the US quietly succeed.

Tue, 04/30/2013 - 15:35 | 3515098 kragsquest
kragsquest's picture

Outrageous, in case you haven't noticed state and federal tax agencies have ruined the lives of countless Americans in the last 20 years while these corporate tax criminals and corporate welfare recipients continue to reap unbelievable and staggering windfalls!

Tue, 04/30/2013 - 16:02 | 3515196 NotApplicable
NotApplicable's picture

What's outrageous is the idea that anyone (or business) should have to hide assets in order to prevent confiscation.

Get rid of this base criminal activity, and the loopholes will take care of themselves. Just think how much richer society would be in the US if it weren't saddled with $16T in debt, plus all of the wealth directly taken by taxes over the last century.

Whenever I think "public goods" I always think "waaaaay overpriced goods." Like a new 911 center that will be built above ground, yet be engineered to withstand an EF-5 tornado.

I'm of the opinion that local govs have been given a mandate to increase indebtedness to the maximum extent they can pull off, so they can qualify for federal bailouts later.

Tue, 04/30/2013 - 15:29 | 3515053 Bam_Man
Bam_Man's picture

They are waiting for Congress to announce a "tax amnesty" program for offshore profits before re-patriating those bucks. I'm sure they've got plenty of lobbyists working on that right now.

In the meantime, they'll borrow at 3% to fund the share buybacks.

Tue, 04/30/2013 - 16:17 | 3515261 dontgoforit
dontgoforit's picture

Heck.  They're the ones who have money out there.  Why would they want to repatriate it?

Tue, 04/30/2013 - 15:15 | 3514993 falak pema
falak pema's picture

the day washington takes on caymanista land will be the day the fight between two oligarchy clans becomes a battle in earnest. 

Tue, 04/30/2013 - 17:26 | 3515529 theprofromdover
theprofromdover's picture

The Caymans -an island worth invading.

Does it have an army to defend it?

Tue, 04/30/2013 - 17:46 | 3515587 michiganmaven
michiganmaven's picture

No it does not have an army but it has the best weapon ever... the big red "delete" button on $6 trillion in held assets in banks... go ahead.. invade.. we dare you...

Tue, 04/30/2013 - 20:54 | 3516145 sethstorm
sethstorm's picture

What good will that button be if it is taken out of service, courtesy of pre-emptive military action?  That big red delete or transfer button will make a great sound and fury but result in nothing (being destroyed or transferred).  It will end up in US jurisdiction, much to the chagrin of those acting to evade it.


Wed, 05/01/2013 - 03:48 | 3516934 theliberalliberal
theliberalliberal's picture

If cyprus sent bit coin to the moon?  cayman would be to....nibiru?

Tue, 04/30/2013 - 16:09 | 3515235 sethstorm
sethstorm's picture

Yet it is a day that must come.  Then again, it would be easy for the US to take out the island (and many other like jurisdictions) on its size and non-presence of military alone.

Tue, 04/30/2013 - 15:07 | 3514964 W T F II
W T F II's picture

I am shocked that Congress has not introduced the "Cash Repatriation Act of 2013"...lobbyists are the BEST...even Maxine Waters is kool with it...!!

Tue, 04/30/2013 - 15:11 | 3514983 Joe Davola
Joe Davola's picture

Pick your favorite holiday eve - that's when it will get introduced, voice 'voted' and auto-penned.

Wed, 05/01/2013 - 03:47 | 3516936 theliberalliberal
theliberalliberal's picture

Yep, I get a wad of cash out before every long weekend now.   

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