There’s little question that on November 6, tech titans will be on tenterhooks as they watch the presidential election results. For one thing, who wins may determine whether today’s laws around repatriation — bringing overseas earnings back to the U.S. — will meaningfully change.
A whole lot is at stake. According to a Bloomberg survey conducted in the spring, 70 large U.S. companies, from Microsoft to General Electric, hold roughly $1.2 trillion in cash overseas, and banking experts estimate that tech companies represent roughly $350 billion of that overseas hoard. Apple alone has more than $65 billion parked abroad from profits it has earned from overseas sales.
Bringing home that foreign money today would mean paying the current, 35 percent U.S. corporate tax rate. But Republican candidate Mitt Romney has said that if elected president, he’ll cut that figure to 25 percent, saying that doing so will drive investment and spur job creation. Romney also wants to enact a “repatriation tax holiday.”
President Obama’s administration, meanwhile, is open to broader corporate tax reforms, including reducing the corporate tax rate to 28 percent. But it isn’t prepared to go nearly so far as the Romney camp and it strictly opposes a tax holiday, which officials believe would do little besides enrich shareholders.
The administration and other critics point to data out of the National Bureau of Economic Research and the Congressional Research Service that shows the last time U.S. companies benefited from such a break – the Homeland Investment Act of 2004, which provided U.S. multinationals with a one-time tax holiday — 92 percent of the $312 billion returned to the U.S. was spent on dividends and stock repurchases, not hiring or other domestic growth initiatives. (Hewlett-Packard, which repatriated $14.5 billion, even slashed 14,000 jobs soon afterwards.)
Companies with ballooning offshore billions are left with few choices in the meantime, including paying the current, hefty rate, which few are amenable to doing; sitting on the capital; engaging in complex accounting maneuvers; or using their far-flung capital to acquire foreign-based companies.
Leaving aside the complex accounting maneuvers, companies are definitely doing some opportunistic shopping. Three of the seven companies that Cisco has so far acquired in 2012 were based outside the U.S. Last month, the network giant acquired Cork, Ireland-based ThinkSmart Technologies for undisclosed terms. In July, Cisco also closed on a $5 billion acquisition of Israeli video software company NDS Group. And in March, Cisco paid an undisclosed amount to acquire ClearAccess, a network management company based in Vancouver.
According to PriceWaterhouseCoopers, in fact, while cross-border activity dropped 21 percent overall between 2011 and 2010, U.S. companies were 21 percent more active last year than in 2010. (They shopped mostly in Europe, where valuations remain far more attractive than in the U.S.)
But companies are also doing plenty of sitting and waiting, say M&A experts. By and large, they simply haven’t felt pressured by their shareholders to put their cash reserves to work. “Strategic acquirers buy companies when and where they find the right fit, the right strategic rationale for buy versus build, where there’s alignment with their customers and product roadmap,” says Mihir Jobalia, a managing director and the group head of KPMG’s Technology Corporate Finance unit. “Strategic acquirers don’t buy companies because there is capital overseas that they need to spend.”
“Acquirers want to buy the companies they want to buy,” adds Steven Fletcher, managing director at the boutique investment bank GCA Savvian. “They won’t do a deal overseas just to put that cash to work; it’s just not the way they operate.”
Whether shareholders will tire of companies’ wait-and-see stance remains to be seen, but they may have little choice if either President Obama is reelected, or a newly elected President Romney isn’t able to deliver on the specific cuts he has proposed, which seems likely. (The nonpartisan Tax Policy Center estimates that his corporate tax proposals would reduce revenue by $1 trillion over a decade, rather than increase it.)
Indeed, while one optimist — Robert Hoffman, a senior VP for government affairs at the Washington, D.C.-based trade group Information Technology Industry Council — says he’s expecting a “serious legislative effort” to rewrite the tax code to begin in January no matter who is elected, Fletcher doesn’t seem to be holding his breath.
Despite all the talk this fall about changes that should and might be made to the corporate tax code, when it comes to repatriation, says Fletcher, the reality is this: “People are always coming up with strategies for how to repatriate [that money] in a tax efficient way. But by and large, there’s no silver bullet out there. No one has a sure-fire solution for repatriating trapped overseas cash.”
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