A Bond Sale Today Keeps Apple's Taxman Away
Yes, Apple has been sitting on a huge -- and controversial -- pile of cash. So why is it selling nearly $20 billion in bonds to pay for its big share buyback program? Most of its cash pile is offshore and would have to make a stop at the IRS first, so Apple is trying to save investors money -- the same investors who are getting some dividend love to assuage the 45 percent drop in stock price since late last year.
May 1, 2013 5:00 AM PT
A week after announcing its first drop in quarterly earnings in a decade, Apple is selling US$17 billion in bonds to fund a $100 billion buyback program for its stakeholders.
The sale will be the largest non-bank bond deal ever.
The move was somewhat unexpected coming from a company with $145 billion in cash on hand and no debt, a rarity among tech companies. However, only a relatively small portion of that cash pile is available in the U.S. An estimated $100 billion of it is stored in offshore accounts that would be heavily taxed if it were to make its way back to the U.S., meaning Apple needs this bond sale to fund its share buyback program.
The capital return might placate some of the investors that have been frustrated with Apple's stock price, which has fallen more than 45 percent -- or about $320 per share -- over the past six months.
Apple did not respond to our request to comment for this story.
When the maker of the iPad and iPhone announced its quarterly earnings report last week, it also revealed it planned to buy back about $60 billion in shares over the next three years in an effort to appease some of its disgruntled shareholders.
"Given Apple's massive cash balance and the recent pressure from institutional investors to increase payouts to shareholders, it's not really a surprise they have elected to take some action," Dave Denis, professor of business administration at the University of Pittsburgh Graduate School of Business, told MacNewsWorld.
Some of the loudest calls for action came from investors like David Einhorn, who sued the company and wrote a much-publicized open letter to investors urging Apple to consider his plan for distributing the company's $145 billion in cash.
Einhorn's suggestions were shot down. However, Apple has drawn up what seems to be a plan that could appeal to all of the company's investors, especially when considering the taxes that would have to be paid if much of Apple's current cash was repatriated, said Denis.
"On net, shareholders are better off under this plan," he noted. "In general, these tax benefits could be offset by disadvantages of debt financing, such as an increased likelihood of default. However, in Apple's case, their financial position is so strong that this bond offering will not have a material impact on the likelihood of default. Therefore, on net, it seems as if investors should be happy with this plan."
iTunes Turns 10
One of the cornerstones of Apple's business model, iTunes, turned 10 this week.
iTunes was born as music industry executives were trying to figure out how to turn consumers away from illegal downloads and keep them buying physical copies of music that were the key to profits. Apple took that opportunity to get consumers to stick with the downloads they wanted, but in a way that would keep things legal and give Apple a cut of the proceeds.
Its success was largely due to the company's ability to keep things simple for the mainstream consumer, said Mark Norman, consultant at Big Man Consulting.
"What Apple does so well with iTunes is simplicity across the whole OSX and iOS ecosystem," he told MacNewsWorld. "Buying a movie on your Mac? Simple. Renting a movie on your Apple TV? Even easier. Want that song you downloaded on your iPad on your Mac? There it is. It's the top destination for consumers of digital media because it's absolutely the easiest way to get to purchase and enjoy media."
Apple kept that simplicity as apps became a part of the mainstream consumer device landscape, said Norman. Since people were already comfortable buying digital media in iTunes, it made sense that the established store would be the place they bought their first of many apps.
"Traditionally, a person would get a computer and use it for a small set of tasks they knew it could do easily," he said. "There seemed to be this otherness about people who knew what they were doing on a computer. With the app culture, there were almost no more barriers to become as savvy as you want. Apple made the App Store an ideal place to safely buy any app."
Celebrating a 10th birthday in the tech industry doesn't mean that iTunes can sit back and relax, Norman added. The growing Android ecosystem may have learned some of its best lessons from Apple, but it is a formidable challenger in an evolving space. For Apple to make sure iTunes maintains its relevance, it has to keep its simplicity and not let consumers know that the company is the one making profits.
"AppShopper seems like a great idea, but Apple seems bent on making sure people have to go through Apple's review and promotions, not pay another entity for a curated set of reviews, for example," he said. "The way they handle in-app subscriptions is fairly greedy. Some of Apple's policies are misguided."