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Too much cash apple's biggest worry.

Mature companies often do not have to scramble for cash to invest in new products. They find themselves pulling in more cash than they require and know how much they should hold or invest in new projects. The case is different for Apple Inc. which holds approximately $145 Billion cash, of which $102 Billion is held overseas. What to do with so much cash? Last year Apple recorded $156 Billion in revenue with $42 Billion in profits. One may argue about stock price slump from $700 to under $400 as a sign that future may not be as promising as the last few years but the fact remains that Apple is likely to continue generating monstrous profits and as such the cash it has hoarded is not needed for running operations. Two questions: First, why is it keeping so much cash and second, what to do with it?

The first question remains a bit of mystery as the genius who built Apple and changed our lives forever is no more there to provide a definite answer. Steve Jobs accumulated a lot of cash for the company and the only explanation Apple offered was that the company wanted to be able to grab future opportunities. "We'd like to continue to keep our powder dry," said Jobs, "because we do feel that there are one or more strategic opportunities in the future. That's the biggest reason." What those strategic opportunities could be remain a matter of debate and speculation, ranging from acquiring telecom operators to several other types of businesses.

Then there is another argument, which Jobs favored, of keeping money for the rainy days. It's not just Apple. Looking around, holding cash is a common trend in U.S. companies since the recession, piling up dollars in record amounts. In 2010, for instance, non-financial companies in the U.S. held $1.93 Trillion in cash, or 7.4 percent of total company assets--the highest ratio since 1959 (International Business Times). The trends in 2013, based on data from about 2,300 U.S. companies compiled by Bloomberg, suggest executives' lack of need or confidence to invest deepened with threats of federal spending cuts and the economic slowdowns in U.S., Europe and China. But then one argues that "how much" is sufficient to keep for the rainy days. Apple just has too much cash.

The second question is even more confusing. What to do with all this cash? There are seemingly obvious solutions such as dividend payouts and stock buybacks but to what extent? Modest amounts (modest from Apple's standards) cannot solve the issue as the company generates profits and keeps filling its coffers. Paying handsome dividends or higher stock buybacks is not simple as more than 70% of cash is held overseas and its repatriation will result in hefty tax liabilities. Apple justifies its large overseas cash holdings to its vast international sales which accounted for over 60% of its total sales.

Tim Cook, who took over as Apple's CEO in 2011 after Steve Jobs, has proved more sensitive to shareholders' concerns. He reinstated the company's quarterly dividend and unveiled a $10 Billion stock buyback program last year, which he has recently announced to increase by another $50 Billion for buybacks by 2015. While Apple denies that its overseas cash holdings are meant to avoid US taxes, the taxation issue came to life again when Apple recently announced that it would finance part of the aforementioned stockholder distributions through borrowings in US debt market. This not only goes against Steve Jobs' obsession of keeping Apple debt free but also raises questions about the tax issue as repatriation of tax would result in heavy tax liabilities. No surprise that taxation issue has attracted immense debate.

According to media sources, the company has not paid any income tax to any country on these offshore cash holdings. According to Bloomberg, Apple subsidiary called Apple Operations International, was incorporated in Ireland and accounts for 30% of Apple's worldwide profit from 2009 to 2011. Tim Cook was recently called to testify before a Senate Subcommittee to answer questions over dodging U.S. taxes. Cook informed the Subcommittee, noting that Apple may now be the largest U.S. corporate taxpayer, "We pay all the taxes we owe, every single dollar ... We not only comply with the laws, but we comply with the spirit of the laws. We don't depend on tax gimmicks. We don't move intellectual property offshore and use it to sell our products back to the United States to avoid taxes. We don't stash money on some Caribbean island. We don't move our money from our foreign subsidiaries to fund our U.S. business in order to skirt the repatriation tax." To some the explanation may sound reasonable and some may point to complicated U.S. taxation system as well. Yet, borrowing to pay stockholders while keeping so much cash (which definitely avoids paying heavy taxes) do point to the validity of taxation arguments.

In any case, the problem persists. What to do with all this cash? Unless some big acquisition(s) come along or creative ways are devised to pay to shareholders, the problem is unlikely to disappear anytime soon. Now raise your hand if you would like to swap your problem with Apple!!!
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Title Annotation:NEWS / TECHNOLOGY / BUSINESS; Steve Jobs
Comment:Too much cash apple's biggest worry.(NEWS / TECHNOLOGY / BUSINESS)(Steve Jobs)
Publication:Economic Review
Article Type:Interview
Date:Jun 1, 2013
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