Silicon Valley's First World Problem

NEW YORK (The Deal) -- Tim Cook's disclosure that Apple  (AAPL) has repurchased $14 billion of its shares over the last two weeks is the latest example of the rich man's problem facing a growing number of technology companies.

According to a recent Moody's Investors Service report, a group of 30 cash-rich tech companies had nearly $570 billion in cash and securities at the close of the third quarter.

The list includes companies such as Apple, Ebay Inc. and Juniper Networks  (JNPR) that have become targets of shareholders, as activist tweeter Carl Icahn and others have magnified scrutiny of how companies deploy their cash.

Rick Lane of Moody's notes that there is a wrinkle in the cash hoard. The 30 companies disclosing the location of their cash held 71% of the funds overseas, presenting tax issues if the companies repatriate the money.

"You have a growing proportion of cash that is generated offshore, and a growing proportion of cash outflows that need to be funded with domestic cash balances," Lane said.

The ballooning cash balances create expectations for dividends and buybacks. Because much of the cash is overseas, the companies may have to fund payouts with debt.

Apple tallied $159 billion in cash and marketable securities at the end of 2014, with nearly $125 billion, or 78%, held by foreign subsidiaries. The Cupertino, Calif. computer and mobile device company launched a record $17 billion bond offering last year to fund its dividend and buybacks.

Lane said that Apple's Aa1 rating incorporates the ability of it to issue $20 billion to $25 billion of incremental debt. "It would likely do that in order to support the ongoing distribution of cash to shareholders," he said.

Following Apple on the Moody's list is Microsoft (MSFT) which had $80.7 billion in cash and marketable securities at the close of the third quarter, of which 94% was overseas.

Meanwhile, of Google's (GOOG) $56.5 billion in cash at the close of the third quarter, 57% was held outside the U.S. Cisco Systems  (CSCO) had 87% of its $48.2 billion in cash overseas as of Sept. 2013, and 76% of Oracle's (ORCL) $39.1 billion was held outside the U.S.

Of the companies Moody's sampled, only Priceline.com  (PCLN) grew its cash at a faster rate than Apple. The Norwalk, Conn., hotel and travel listing company's cash and marketable securities increased from $400 million at year-end 2006, to $6.6 billion by the end of the third quarter 2013, an increase of 1424%. Apple's cash has increased close to 1140% during the same period.


Carl Icahn disclosed via Twitter's (TWTR) social media app in January that he had boosted his Apple holdings to $3.6 billion. He added that more aggressive buybacks were a "no brainer" in a letter to fellow Apple investors.

Pacific Crest Securities analyst Andy Hargreaves suggested that Tim Cook and Apple are not bowing to pressure from activists by repurchasing shares and paying a dividend.

"It's great that Carl Icahn figured out how to use Twitter and that he's got a 1% stake," Hargreaves said.

Apple appears "perfectly comfortable" with the system of deploying cash that its management has devised over years of analysis, he suggested.

"In the spectrum of ways you return cash, one way is to be loud, say what you are going to do and how are going to do it, which pops the stock and is good for activists" who may want to flip their shares, Hargreaves added. "It also generally results in your buying back your stock at an artificially inflated price."

The alternative is not to broadcast intentions and avoid driving up the price of securities your company is purchasing. "That's what Apple is doing and I appreciate that method," Hargreaves said.

Barclays Capital analyst Ben Reitzes suggested in a Friday note that Cook detailed Apple's buybacks in a Wall Street Journal interview "to remedy several inadequate answers on last week's [first quarter] conference call that we believe many investors found disappointing." One question after the call, he suggested, is why Apple was not buying shares more aggressively while the price neared $500 per share.

Cash stockpiles are not the sole focus of agitators. Pressure on Ebay and Juniper stems, at least in part, on a critique of the companies' asset portfolios.

In the case of Hewlett-Packard's (HPQ) 2011 clash with Ralph Whitworth's Relational Investors, governance was a central issue.

Given the political tension in Washington, D.C. and the place in the political cycle, Moody's analyst Lane suggested that temporary or permanent legislation to encourage repatriation of cash is not likely for the current administration.

Companies may take steps to preempt activism, he suggested.

Following Apple's disputes with David Einhorn's Greenlight Capital in 2013, Altera  (ALTR) increased its stock buyback from about 11 million shares to more than 40 million shares, issuing $1 billion in note to fund the purchases. Unlike Apple, the San Jose chipmaker had not faced activist threats.

"You might see some companies saying we want to better control our fate," Lane said, "as opposed to having a disproportionate amount of pressure from an outside party."

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