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How Much Is Apple's Cash Position Really Worth?

|About:Apple Inc. (AAPL)


As everybody knows by now, Apple's (NASDAQ:AAPL) balance sheet has a very robust cash position, standing at 145 billion USD at the end of Q2 2013.

At the same time Apple released their Q2 results, the company announced the largest buyback of shares in history for a total value of up to $60B, spread out over 2.5 years. It was very interesting to note the company decided to issue debt to finance these stock repurchases. At first, investors were baffled by this move as Apple has more than enough cash available on their balance sheet (and would make plenty of additional cash flow over the next few years) to cover the share buyback.

The main reason why Apple issued debt is the fact that the majority of their cash pile is being held overseas in locally incorporated subsidiaries. Those subsidiaries pay substantially less taxes than if they would have to pay the US corporate tax rate of 35%. A secondary reason is obviously the fact that the interest rates are extremely low, which greatly reduces borrowing costs for a blue chip company.

The Situation

Apple claims 61% of their revenues are coming from overseas sales, and that's why the company keeps approximately two thirds of its cash position in overseas accounts. As CEO Tim Cook categorically denied the company has accounts on the Cayman Islands or any other sunny Caribbean tax paradise, I can only assume the majority -if not all- of the overseas money is held through affiliates incorporated in Ireland, where Apple's 100%-owned subsidiaries; Apple Sales International and Apple Operations Europe are located.

According to Phillip Bullock, who's Apple's head of tax policy, the company has negotiated a deal with the Irish authorities whereby Apple's local subsidiaries only have to pay a 2% corporate tax rate, as opposed to the 35% rate in the USA. According to a source in the same article, Apple's local subsidiary paid only 0.05% corporate tax in 2011.

This extremely low tax rate is the main reason why I think the majority of the 100 billion USD is being held in Ireland (at least officially, as the Irish Apple-subsidiaries actually use bank accounts in the United States).

The Problem

The problem is the fact that the money is de facto 'blocked' within the accounts of the Irish subsidiaries. Apple cannot use their 100 billion USD to buy back stock or to pay out dividends to the AAPL-shareholders.

Using the 100 billion to acquire another company/companies is theoretically a possibility, but only a short-lived one. As the Irish subsidiary would become the owner of any acquired company, the consolidated entity would still be incorporated in Ireland, and all future profits would also just be taxed in Ireland. This would just be kicking the can down the road.


This leads to my end remark. If the options to do basically anything with the money without transferring it back to the United States are limited, what's the point of keeping the money overseas? And more importantly, should a (potential) investor value the cash position on the balance sheet at its face value, or apply a discount to the cash held in overseas accounts?

I cannot emphasize enough Apple isn't doing anything illegal (several other companies are doing exactly the same), but my main concern is that its 100B USD cash position in Ireland might only be worth 65 billion, after applying a 35% US corporate tax rate.

As the possibilities to use the current Irish cash position are extremely limited, wouldn't it be better for Apple to swallow the bitter pill? The company could bring 80 billion home (and leave 20 billion at the Irish subsidiary for 'working capital purposes'). This one-off move would bring 52 billion USD into Apple's domestic treasury (after deducting a 35% US corporate tax). Apple could pay 50 billion out as a 'special dividend' to its shareholders, which would equate to approximately $50/share.

Apple obviously won't pay a $28B tax bill out of some sudden 'patriotic sense of duty', but it might be the best solution as its options to put the cash somewhere else at work are limited. It is my opinion Apple should swallow the 35% tax-pill (or negotiate a lower effective rate with the IRS) and bring the money home so it can do with it whatever it wants.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Stocks: AAPL