21 May 2024

Tech giants and the corporate bond market

| The European |

This century has seen the rise of Tech giants like Google, Apple, Microsoft, Facebook and Oracle. These companies are of US origin. However, they conduct their businesses globally and therefore earn significant revenue from markets abroad.

US Tech companies prefer keeping their foreign revenue in offshore tax havens for obvious reasons. America is known for its high tax rates.

Tech companies have to distribute dividends. Some of those companies roll out “share buyback” schemes. Others have different types of financial commitments to meet. Executing these activities requires Billions of US Dollars. From an investors’ point of view, a question that arises is how exactly these companies meet their financial obligations in the US while their funds are parked outside of the US.

The financial industry facilitates these tech companies to meet their financial obligations. The common man is however not aware of the financial wizardry involved.

Tech companies over the years issued corporate bonds in the American debt market to meet their financing needs. The interest amount paid/to be paid on account of sales of these bonds was less as compared to tax liability on funds parked abroad, if they ever were repatriated. Over the period of time, these tech companies became “large corporate bond sellers”. Bloomberg named them “non-financial borrowers”.

Business Insider (UK) reported in April 2018 that “Apple has the largest cash pile ($261 billion) amongst US companies”. It further said that “a large chunk of that cash pile is stashed overseas (out of the USA)”. As per Bloomberg (31 August, 2018), Apple has accumulated corporate debt of more than $150 billion.

Rather than focusing on any specific company, let’s study the overall impact of these tech companies on the US economy.

Before Trump administration, tech companies were continuing with their strategy of corporate bond sales and were piling up US debt market to meet their cash flow requirements (e.g. acquisitions, share buybacks, shareholder payouts etc.). The recent tax overhaul, made by Trump administration incentivised these Tech companies to repatriate their funds to USA.

Bloomberg reports (on 31 August, 2018) that after the revision of tax regulations, tech companies have repatriated $306 billion from abroad. “Strategas Securities”, a US based brokerage and advisory firm estimates that the total amount could reach  $700 billion by end of the year (2018).

Impact of Repatriation

With funds in hand, most of the tech giants intend to “buyback” their shares. For an existing shareholder, the share buyback is like a dividend payout, albeit more attractive. The companies benefit from it because decreased supply of its shares in the equity market raises its share price, a simple application of demand and supply theory.

The following example makes it simple to understand the financial benefit of “share buyback”. (Please note that rates and amounts given are for example purposes).

Funds repatriated from abroad, if invested in Treasury bills –  $100 @ 2% equals to $2.

Payout to shareholders who hold shares worth the $100 @ 10% equals to $10

The resulting economic value is “negative” ($8).

Therefore, if $100 worth of shares are “bought back” from shareholders, it will result in significant savings.

It is very easy to comprehend that repatriated excess funds, if utilised for “share buyback”, will save money for these tech giants long term. Hoarding cash now is not wise. In fact, the savings can be utilised to pay corporate debt liabilities as and when they become due.

US corporate debt market was significantly influenced by these “non-financial borrowers”. In coming years it will see a significant decline in sales of corporate bonds. The economic pundits are working on different probable outcomes that might result due to sudden cash influx caused by tech giants. By end of this year, actual position will surface out and future direction of the US corporate debt market will be set.

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