Apple is now free to bring home its overseas cash — here’s what it might do with it

Apple CEO Tim Cook's company has more than $200 billion in foreign cash. How exactly it will spend it is an open question.

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Apple CEO Tim Cook’s company has more than $200 billion in foreign cash. How exactly it will spend it is an open question.
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Getty

  • Apple has about $250 billion in overseas cash.
  • The tax law enacted at the end of last year gives the company incentives to transfer those holdings to the US.
  • Apple has said it owes $38 billion in taxes on that amount and has suggested it plans to spend tens of billions of dollars more on investments.
  • But it’s an open question how the company will parcel out its overseas funds.

Apple’s plan to bring home hundreds of billions of dollars in overseas cash has triggered a guessing game on Wall Street about what it will do with all that money.

The tech giant could find itself with about $200 billion to spend, after taxes, if it repatriates all its overseas holdings into the US.

Whether Apple uses the cash to go on an acquisition spree, to shower its shareholders with wealth, or to expand its operations in the US, the move will almost certainly have a profound impact on the tech industry and the broader economy.

Company officials have suggested in the past that Apple plans to distribute much of its $250 billion in foreign holdings to shareholders. But that pile of cash will be reduced by taxes. And Apple implied Wednesday that it would be taking some of its overseas money and investing it in a new corporate campus, new data centers, and a fund to support US manufacturing partners.

“We have a deep sense of responsibility to give back to our country and the people who help make our success possible,” CEO Tim Cook said in a statement.

An Apple representative did not immediately return a call seeking clarification about the company’s plans for its overseas cash.

The tax payment was prompted by the new tax law

Before talking about how Apple will spend the money, it’s important to understand some of the dynamics surrounding its overseas cash pile.

As of the end of Apple’s fiscal year last September, the iPhone maker had $253 billion in overseas cash and so-called marketable investments. That money represents earnings generated by Apple’s foreign subsidiaries.

Under previous tax laws, Apple technically owed taxes on those foreign holdings but didn’t have to pay them until it officially transferred the money to its US subsidiaries or parent corporation. So Apple and other companies kept the cash with their foreign subsidiaries while lobbying to have tax rates reduced on their overseas holdings.

The new tax law Congress passed in December and President Donald Trump signed gave corporations such as Apple just what they wanted, reducing the rate they’d have to pay on repatriated cash to 15.5% from 38%. But it also forced companies to pay taxes on their foreign holdings immediately, regardless of whether they kept that money overseas or brought it to the US.

In an announcement Wednesday, Apple said it expected to pay $38 billion in taxes on its overseas cash. That amount implies the company had about $245 billion in taxable foreign holdings. If you take out the taxes, that would leave Apple with about $207 billion to play with.

What might a shopping spree look like

Many observers on Wednesday were quick to speculate about which companies Apple may acquire.

The video-streaming service Netflix and the automaker Tesla are two companies that come to mind.

Both would help Apple get a leg up in important markets, given Apple’s growing TV and video plans and its development of autonomous-driving technology. And given the $94 billion and $58 billion market caps that Netflix and Tesla command, Apple could afford either, or both.

Apple could spend its overseas cash buying other companies, potentially including Tesla.

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Apple could spend its overseas cash buying other companies, potentially including Tesla.
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Benjamin Zhang/Business Insider

But as Dan Morgan, a senior portfolio manager at Synovus Trust Company, noted to Business Insider: Apple doesn’t have a history of making megadeals.

“Traditionally, they like to keep it in-house,” Morgan said of Apple’s product strategy.

Apple’s $3 billion acquisition of Beats in 2014 was an anomaly that still has many observers of the company scratching their heads.

“I don’t know if it’d be a huge megadeal, but I think something to the effect that it allows them to engage in a different market or to expand a market where they don’t have a leadership role” could make sense, says Morgan, whose firm owns roughly 300,o00 shares of Apple.

Another option: acquiring some of the smaller companies that make components for the iPhone and other Apple products.

Apple investors will likely see a windfall, but perhaps not has big as they were expecting

Apple has already earmarked some of the cash for its shareholders. Apple has an active dividend and stock-buyback program that is designed to return excess cash to shareholders. And last February, company CFO Luca Maestri implied that if the US reduced tax rates on foreign holdings, Apple would be able to give more money to investors.

Such a move would give Apple “additional flexibility around our capital return activities,” Maestri told the Financial Times.

But in its announcement on Wednesday, Apple suggested that it planned to use at least some of its overseas cash on new investments. The company plans to spend $30 billion over the next five years on so-called capital expenditures, things like new equipment, property purchases, or buildings.

Some of that money will go to a new campus, the company said. But Apple said it also planned to devote $10 billion to its US data centers. It wasn’t clear whether the company planned to open new data centers or expand existing ones.

The company also said it planned to expand a fund it created to boost suppliers that manufacture their products in the US to $5 billion from $1 billion.

Apple wasn’t clear on just how much of its investments would come from its overseas cash

But it was unclear exactly how much of these investments would come from Apple’s overseas cash stash as opposed to the cash it generates from its ongoing operations, an amount that last year totaled $64 billion. Even if you subtract out the money it devoted to paying out dividends and buying up stock, it still would have $18 billion left over.

It also was unclear whether these announced investments would even represent an increase.

The $30 billion in capital expenditures over five years, for example, sounds like a lot in the abstract. But that averages out to about $6 billion a year. By comparison, Apple nearly $15 billion on capital expenditures in its most recent fiscal year and had already said it planned to spend $16 billion in its current fiscal year.

And don’t forget about its debt

When Steve Jobs left Apple, the company was debt-free. Not anymore.

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When Steve Jobs left Apple, the company was debt-free. Not anymore.
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YouTube/AllThingsD

And the company may want to devote a sizable chunk of its overseas cash to one other use: paying down debt. The company that was debt-free as recently as 2012 now owes a whopping $97 billion.

Apple took on that debt to fund its gargantuan dividend and stock-repurchase efforts without tapping into its overseas holdings – and incurring taxes. So, in a sense, shareholders already got a piece on Apple’s foreign stash.

Then again, Apple is paying relatively low rates on that debt, so it may choose to pay it off over time rather than all at once.

Business Insider Tech Editor Alexei Oreskovic contributed to this story.