Financial Times - Companies
Bold attempt to unlock tech cash reserves
suggest the piling up of wealth is about to be met with a wave of financial engineering...
http://link.ft.com/r/8P1R88/MJPXET/IYLFJP/EXV4ZZ/K9H739/FW/h?a1=2013&a2=2&a3=8
“It is kind of like my grandma Roz. She wanted to hoard money. She would not leave me a message on my answering machine because she did not want to be charged for a phone call. It is really hard to convince somebody with that mindset to change what they’re doing. We have come up with what we think is a win-win situation for Apple where Apple gets to keep its war chest, they get to keep the money, they get to have it for bad times, for growth, for acquisitions.” [Bloomberg TV, earlier]
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Bold attempt to unlock tech cash reserves
The tech industry’s near-$500bn treasure chest has become one of the stock market’s most alluring targets – and some creative minds in the investing world think they have finally found ways to unlock it.
The stash of nearly half a trillion dollars represents the cash and investments held by the 20 largest US technology concerns. It is the product of hoarding by companies with huge cash flows but a historic aversion to distributing their excess riches to shareholders.
Two unrelated events on Thursday suggest that this conspicuous piling up of wealth is about to be met with a wave of creative financial engineering.
In a regulatory filing, PC maker Dell revealed that it plans to bring more than half of its $14.2bn in cash and investments into play to support the proposed buyout by founder Michael Dell and private equity firm Silver Lake.
Meanwhile, hedge fund manager David Einhorn launched an attack on Apple in an effort to force the company to cough up more of its mounting cash pile, using a novel approach based on issuing a new class of preferred stock.
The moves reflect fresh responses to the two main issues that have prevented tech companies from dispensing more of their cash up to now.
One is a concern that it will limit their financial flexibility while doing little for their stock prices.
Exhibit A in this regard is Microsoft. Beset by a flagging share price after the tech industry bust, the software maker dipped into its own cash reserves in 2004 to pay a special dividend of $32bn to its shareholders. It also began to pay a regular dividend at the same time.
Its share price since then has gone nowhere, even as it has ramped up its regular payout in recent years to give it an above-market dividend yield.
According to Bill Miller, one of the best-known US value investors, part of Microsoft’s problem has lain in not being clear enough about what it plans to do with the cash reserves that are still piling up: more dividend-hungry investors would be drawn to the stock if they knew how much Microsoft had earmarked for them.
Yet this alone would not address the dilemma that tech companies face as they seek to draw a new class of value investors looking for higher yields while at same time trying to appease a traditional shareholder base focused solely on growth.
Issuing a separate class of preferred stock would get around this, according to Mr Einhorn, whose fund, Greenlight Capital, owns nearly $600m of Apple stock. It would in effect leave investors with a choice of whether to make a growth or a value bet when investing in Apple.
The $50bn securities would be targeted at income investors to test the waters for demand. Greenlight argues that a 4 per cent dividend, costing Apple just $2bn year, would be a proof of concept, and would be in line with the sub-4 per cent yield on 30 year debt issued by Microsoft, according to Mr Einhorn.
A 4 per cent yield is equivalent to a 25 times earnings multiple, a far higher valuation than that for Apple stock. When it rejected the idea last year, the company told Greenlight that it was advised that an 8 per cent yield would be required – a position contested by Mr Einhorn, who argued that the yield would be closer to that on Microsoft’s debt.
The second restraint on higher cash distributions by tech companies, meanwhile, has come from the geographic location of their financial reserves.
Some 72 per cent of the money is held outside the US, according to bond rating agency Moody’s Investor Service: bringing that back to the US, which companies would have to before using it for corporate purposes like paying dividends, would result in a 35 per cent US tax charge.
US tech companies have lobbied hard for a tax holiday, arguing that it would free them up to bring more money back to invest in the US.
In an interview with the Financial Times recently, John Chambers, chief executive of Cisco Systems, which has 83 per cent of its cash overseas, warned that his company was tired of waiting for relief from Washington and would soon put the money to use in other countries instead.
Dell’s buyout could represent one tax-efficient response to this roadblock. As part of its proposed buyout, the company said that it will reshuffle its reserves to repatriate $7.4bn of cash.
Ordinarily, that would result in a significant tax charge. But Dell can look forward to a degree of relief thanks to the large interest payments it will face on the debt needed to take it private, said Edward Kleinbard, a professor of law at the USC Gould School of Law.
It would be able to apply interest costs in the two years after a buyout to retroactively reduce the tax liability, he added – an amount that would be unlikely to offset much of the tax, but would still lessen the impact.
Additional reporting by Tim Bradshaw in San Francisco
The stash of nearly half a trillion dollars represents the cash and investments held by the 20 largest US technology concerns. It is the product of hoarding by companies with huge cash flows but a historic aversion to distributing their excess riches to shareholders.
Technology companies' cash piles
Two unrelated events on Thursday suggest that this conspicuous piling up of wealth is about to be met with a wave of creative financial engineering.
In a regulatory filing, PC maker Dell revealed that it plans to bring more than half of its $14.2bn in cash and investments into play to support the proposed buyout by founder Michael Dell and private equity firm Silver Lake.
Meanwhile, hedge fund manager David Einhorn launched an attack on Apple in an effort to force the company to cough up more of its mounting cash pile, using a novel approach based on issuing a new class of preferred stock.
The moves reflect fresh responses to the two main issues that have prevented tech companies from dispensing more of their cash up to now.
One is a concern that it will limit their financial flexibility while doing little for their stock prices.
Exhibit A in this regard is Microsoft. Beset by a flagging share price after the tech industry bust, the software maker dipped into its own cash reserves in 2004 to pay a special dividend of $32bn to its shareholders. It also began to pay a regular dividend at the same time.
Its share price since then has gone nowhere, even as it has ramped up its regular payout in recent years to give it an above-market dividend yield.
According to Bill Miller, one of the best-known US value investors, part of Microsoft’s problem has lain in not being clear enough about what it plans to do with the cash reserves that are still piling up: more dividend-hungry investors would be drawn to the stock if they knew how much Microsoft had earmarked for them.
Yet this alone would not address the dilemma that tech companies face as they seek to draw a new class of value investors looking for higher yields while at same time trying to appease a traditional shareholder base focused solely on growth.
Issuing a separate class of preferred stock would get around this, according to Mr Einhorn, whose fund, Greenlight Capital, owns nearly $600m of Apple stock. It would in effect leave investors with a choice of whether to make a growth or a value bet when investing in Apple.
The $50bn securities would be targeted at income investors to test the waters for demand. Greenlight argues that a 4 per cent dividend, costing Apple just $2bn year, would be a proof of concept, and would be in line with the sub-4 per cent yield on 30 year debt issued by Microsoft, according to Mr Einhorn.
A 4 per cent yield is equivalent to a 25 times earnings multiple, a far higher valuation than that for Apple stock. When it rejected the idea last year, the company told Greenlight that it was advised that an 8 per cent yield would be required – a position contested by Mr Einhorn, who argued that the yield would be closer to that on Microsoft’s debt.
The second restraint on higher cash distributions by tech companies, meanwhile, has come from the geographic location of their financial reserves.
Some 72 per cent of the money is held outside the US, according to bond rating agency Moody’s Investor Service: bringing that back to the US, which companies would have to before using it for corporate purposes like paying dividends, would result in a 35 per cent US tax charge.
US tech companies have lobbied hard for a tax holiday, arguing that it would free them up to bring more money back to invest in the US.
In an interview with the Financial Times recently, John Chambers, chief executive of Cisco Systems, which has 83 per cent of its cash overseas, warned that his company was tired of waiting for relief from Washington and would soon put the money to use in other countries instead.
Dell’s buyout could represent one tax-efficient response to this roadblock. As part of its proposed buyout, the company said that it will reshuffle its reserves to repatriate $7.4bn of cash.
Ordinarily, that would result in a significant tax charge. But Dell can look forward to a degree of relief thanks to the large interest payments it will face on the debt needed to take it private, said Edward Kleinbard, a professor of law at the USC Gould School of Law.
It would be able to apply interest costs in the two years after a buyout to retroactively reduce the tax liability, he added – an amount that would be unlikely to offset much of the tax, but would still lessen the impact.
Additional reporting by Tim Bradshaw in San Francisco
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