Overseas Acquisitions, Overseas Cash?


Many high-profile acquisitions of overseas companies by U.S. IT multinational corporations are being funded by cash those U.S. businesses have overseas.

Moody's Investors Service in March reported that U.S non-financial companies had $4.45 trillion in cash at the end of 2012. Of that cash, about 38 percent of the total, or $556 billion, is held by tech companies.

The amount of cash those companies had overseas by the end of 2012 reached $840 billion, or about 58 percent of their total cash holdings, Moody's reported.

For many companies, the cash sitting overseas represents an opportunity to acquire foreign companies, and several high-profile acquisitions have been financed with overseas cash holdings.

In September, Microsoft said its planned acquisition of Nokia's device and services business, along with its planned licensing of much of Nokia's intellectual property, is being funded in large part with Microsoft's overseas cash resources. Microsoft also used its overseas holdings to help fund its 2011 acquisition of Skype.

Overseas cash helped fund Hewlett-Packard's monster $11-billion-plus acquisition of Autonomy as well.

And Cisco Systems in 2012 financed its $5 billion acquisition of U.K.-based video services software company NDS Group through overseas cash.

Taxes on overseas income may put Dell, which in September agreed with its shareholders to go private, in a bind. In June, before the deal was finalized, The Wall Street Journal reported that Dell CEO Michael Dell and his investment partners might have to use Dell's overseas cash to fund the deal, triggering a potential tax bill of up to $2.6 billion.

Microsoft, Dell, and Hewlett-Packard declined to comment for this story, while Cisco confirmed the NDS Group acquisition.

But are acquisitions the best use of overseas cash for these companies?

In an April 2013 report titled "Trapped Cash and the Profitability of Foreign Acquisitions," associate professors from the University of Toronto, the University of Texas at Dallas, and the University of Iowa found that companies with high levels of trapped cash "make less profitable cash acquisitions of foreign target firms than MNCs [multinational corporations] without trapped cash."

Indeed, according to the authors, after the 2004 tax holiday on foreign income that was part of the American Jobs Creation Act, the profitability of foreign cash acquisitions fell "significantly."

Using that cash to acquire domestic U.S. companies would require repatriating the cash first, thereby triggering the 35 percent corporate income tax rate.

Marty Wolf, president of MartinWolf, a San Ramon, Calif.-based mergers and acquisitions advisory firm, told CRN the current tax code has a huge impact on where companies make acquisitions in the same way that putting your thumb on a scale impacts the balance.

"For global companies, if there's equal opportunities over the globe, and not a toll on the reparation of profits, we would see companies look for the highest yield," Wolf said. "Let's say Cisco wanted to buy EMC or another company. It would have to borrow money. They couldn't use their overseas money. It's disruptive. Otherwise, you'd see a lot more acquisitions in the U.S."

The current tax treatment of foreign income puts U.S. companies at a disadvantage when it comes to acquiring other U.S. businesses, Wolf said.

"In a hypothetical case, an Indian company with profits substantially less taxed than an American company pays a lower rate on global profits," he said. "A U.S. company, to compete, would have to add debt to acquire another company because it couldn't bring the cash into the U.S. If you can't bring back retained earnings, you have to add debt because those are the only two things on the right side of the balance sheet. So the best way to buy a U.S. company is to not be a U.S. company."

PUBLISHED SEPT. 23, 2013