NEW YORK (TheStreet) - Maybe, in light of eBay's (EBAY) earnings-wrecking $3 billion repatriation charge, investors should focus a bit more on the hundreds of billions of dollars in unrecognized tax liabilities that Apple (AAPL), Google (GOOG), Microsoft (MSFT), Hewlett-Packard (HPQ), and Cisco (CSCO) have created by keeping foreign profits abroad.
There are two ways of looking at eBay's repatriation.For tech start-ups, the move to bring $9 billion of the company's about $14 billion in foreign earnings to the U.S., creating a $3 billion charge, may be fodder for the next mega deal in the Silicon Valley as eBay looks to bolster its portfolio. On the other hand, the repatriation may be a sign eBay cannot invest all its foreign earnings abroad. If the latter proves true, it could mean a wave of similar charges for U.S. tech giants who've stockpiled over a quarter trillion of dollars' worth of foreign profits in low tax jurisdictions. Repatriating foreign earnings to U.S. shores, as eBay has now shown, can create quite the tax bill. On a GAAP basis, the company lost $1.82 a share in the quarter as a result of the repatriation. But it is unclear what eBay's intent is in bringing those earnings to the U.S. If eBay is taking a tax hit in order to make a large acquisition then that might be a silver lining for the tech sector. Alternatively, eBay said on a conference call with analysts on Tuesday no acquisition is imminent and it may use foreign cash to reinvest in its U.S. business or support stock buybacks. So pick how you interpret the repatriation. eBay was decidedly vague about its rationale, which at first glance appears to be a dramatic change in strategy from what the company disclosed in its annual 10-k filing with the Securities and Exchange Commission. Acquisitions? The $6 billion in net foreign earnings that eBay is looking to repatriate, after tax charges, is an amount that seems enough to help the company finance an acquisition of Square, Etsy, Pinterest or Airbnb were the company to combine its cash with stock or debt financing. "Just to be clear, we are not announcing any large U.S.-based acquisition, nor are we committing to finance our share buyback with offshore cash," eBay CFO Robert Swan said on a conference call, of eBay's foreign earnings repatriation It wouldn't be a surprise if, on the heels of those comments, VC's are busy this morning sprucing up their eBay pitch books given the repatriation. To be clear, eBay's PayPal division recently denied a Wall Street Journal report that it was pursuing a bid for mobile payments startup Square. Maybe that will change. "The company denied having a specific acquisition target(s) in mind, but we believe this move sends up a bright flare over Silicon Valley that it is looking for deals (and it would be an expensive way to finance the buyback)," Wells Fargo analysts said of the repatriation. That's the optimistic read. A Repatriation Trend as a Threat? The negative way to read eBay's move is to view it as an early indicator of similar risks at the company's larger competitors, be it Apple, Microsoft, or Google. If eBay is taken at its word and no acquisition emerges imminently, then the company may see a better ability to invest its earnings domestically, creating a big tax bill. Here's what CFO Swan said on Tuesday: [H]istorically we've assumed that the significant majority of our international earnings would be permanently be deployed internationally... I think what's changed is, the opportunities in the U.S., while we have a strong balance sheet and our cash balance continues to grow, the opportunities in the U.S. are even bigger... [Our] historical election was no longer valid, so that resulted in the accounting change. That is a big change from February, when discussing its foreign earnings in its annual 10-k filing, eBay stated "we currently have no plans to repatriate those funds." In 2013, eBay provided U.S. tax on approximately $450 million of non-U.S. earnings that the company expected to repatriate in the future, but kept $14 billion held abroad. It's planned repatriation grew twenty-fold in the first quarter, leading to the $3 billion non-cash charge. "[If] and when we repatriate the cash, we will have a cash obligation to the IRS. So we've provided the non-cash charge in terms of the earnings implications, but when we bring that money back, we'll have to actually write a check," CFO Swan added on Tuesday. On the same week that Apple tapped debt markets for $12 billion, adding to the $17 billion of debt on its balance sheet to help finance a fast rising $3.29 a share quarterly dividend and $90 billion in share buybacks, it might be time for investors to pay more attention to repatriation risks across Silicon Valley. Maybe U.S. cash balances and debt offerings won't suffice, in the long-term, for the amount of buybacks and dividends investors' expect. Consensus also minimizes the prospect repatriation becomes an issue for the tech sector. When Yahoo! does eventually exit its 24% stake in e-commerce giant Alibaba, investors will see evidence of whether or not they have properly anticipated corporate tax bills. For now, here's a look at what the tech sector's biggest names said about the scope of their undistributed foreign earnings in recent annual 10-k filings with the SEC. EBay Takes $3 Billion Repatriation Charge, Beats Earnings EBay Earnings: All Quiet On The Russian Front?
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