Πηγή: Barron's
By JACQUELINE DOHERTY
Dec 10 2011
U.S. companies are flush with cash, and tax laws have encouraged them to keep a growing stash overseas. But parking money in Europe could pose problems.
American corporations are sitting on record amounts of cash, but that doesn't mean their greenbacks are safely tucked away at a bank down the block from headquarters. To the contrary, billions of dollars worth of corporate cash and short-term securities sit in foreign subsidiaries located in undisclosed countries. A lot of this money might not even be in dollars.
In a serene world with healthy financial markets, the whereabouts of all this cash might give few people pause. But Europe's sovereign-debt woes alone, not to mention worries about the solvency of the continent's large banks, ought to beg the question: How safe is that money?
We're not talking small change here. Cash and short-term investments of non-financial companies in the Standard & Poor's 500 topped $1.1 trillion as of the end of the year's third quarter, according to Capital IQ. That's up 70% from 2007 and roughly 200% in the past 10 years. Companies have boosted their cash positions amid uncertainty about the economy and the availability of financing through banks and the capital markets. "Since the financial crisis, companies have built up cash to hold larger liquidity buffers," says Ron Chakravarti, a managing director and head of Global Solutions, Liquidity and Investments, at Citigroup.
Increasingly prodded by regulators, some of the largest cash hoarders in the S&P break out in their financial statements how much cash is invested domestically and how much is parked overseas.Microsoft (ticker: MSFT), for example, has $6.4 billion of cash and investments in the U.S. and $51 billion in other countries.Cisco Systems (CSCO) is holding $3.8 billion in the U.S. and $40.6 billion elsewhere. At Oracle (ORCL), the breakdown is similar, if not as extreme: $8.5 billion held in the U.S., and $23 billion invested internationally.
Johnson & Johnson (JNJ), which has $31 billion of cash and securities, and Pfizer(PFE), with $38.6 billion of cash and investments, don't provide such details in their financials. A J&J spokesman declined to comment, while a Pfizer spokesman toldBarron's the drug company doesn't have significant exposure to the economies of Portugal, Italy or Greece, and has only minimal exposure to Ireland. All are among Europe's most troubled.
AMERICAN COMPANIES HAVE HUGE cash stashes overseas for several reasons. Some generate the money abroad and keep it there to fund local capital expenditures and acquisitions. Others establish foreign subsidiaries in low-tax locales. Above all, many companies have been reluctant to incur a repatriation tax that could climb as high as 35% when corporate cash is returned to the U.S.
A Cisco spokesman explained that the company's cash and investments are lower in the U.S. than abroad because most of its expenditures are in the U.S. But the company doesn't want to bring its cash home from overseas because of the repatriation tax, the spokesman said.
Congress enacted a tax holiday in 2004 to encourage repatriation of offshore profits, lowering the levy to 5.25% and requiring remitted funds to be used for investment, not dividends or stock buybacks. There has been much disagreement about its success and no holiday since, and a similar reprieve has been the subject of heated debate as Congress wrangles with year-end tax legislation.
To be sure, some corporations do a commendable job of disclosing how their cash and equivalents are invested. Cash-rich Apple(AAPL) noted in its latest filing that it had invested $35 billion in corporate securities; $13.5 billion in government-agency debt; $10.8 billion in Treasuries; $5.6 billion in non-U.S.-government securities; $4 billion in certificates of deposit and other time deposits; $2.9 billion in commercial paper; $3.1 billion in money-market and other mutual funds and $2.9 billion in cash. Even companies with the most detailed disclosures, however, typically don't provide information on the specific currencies and securities in which their cash is invested.
Questions about cash investments are "totally valid, especially because there is risk associated with currencies," says Trevor Harris, acting professor and co-director of the Center for Excellence in Accounting and Security Analysis at the Columbia Business School.
ALTHOUGH S&P 500 COMPANIES generate 46.3% of their revenue overseas, it is surprisingly difficult to find comprehensive data on the amount of cash they retain abroad. A survey conducted last spring by Citi for the Association for Financial Professionals found that 53% of the 364 financial professionals who responded indicated their organizations had cash holdings outside the U.S. The survey additionally found that among companies with foreign cash holdings, 57% of the cash was invested in the U.S.; 14% was stored in Canada and Mexico; 4% was held in Central and South America; 17% was invested in Europe, the Middle East and Africa, and 8% was sitting in Asia Pacific countries.
The survey also solicited information on specific investments. Companies with more than $1 billion of annual revenue said 33% of their cash was in bank deposits; 28% was in diversified money-market mutual funds; 12% was in money-market funds that hold Treasuries; 5.9% was directly invested in Treasuries; 5.1% was in commercial paper and 2.6% was in agency debt.
Many short-term cash investments now yield less than 1%. More important, many corporate treasurers discovered amid the 2007-'08 financial crisis that such investments aren't always risk-free. Many auctions failed, for instance, in a segment of the auction-rate securities market, and investors in such seemingly safe instruments no long could sell their holdings without incurring substantial losses.
This time around, the risk is more likely to come from currency exposure. Cash deposited at a European bank could be denominated in euros. If the host country withdraws from the European Union—such talk isn't idle—the denomination of the company's deposits could revert to the sovereign currency, which probably would plummet relative to the dollar.
Corporate cash invested in commercial paper typically is considered unsecured debt. If a European bank with CP outstanding were to file for bankruptcy protection, as some market watcher fear could happen in Europe, holders of the paper couldn't recover their investments until the secured creditors were made whole.
Even cash that sits in money-market funds could be at risk, as roughly 40% of money-market-fund assets are invested in European bank securities, according to Fitch Ratings.
SOME COMPANIES, AS NOTED, PARK their cash overseas because that's where they generate it. Europe accounts for 14% of S&P 500 sales.
At Home and Abroad
These 10 companies have the biggest cash holdings among non-financials in the S&P 500. But overseas cash would have to be taxed before it could be brought home.
Likewise, a subsidiary in a low-tax country can lend money to operations in high-tax jurisdictions. The lender would generate interest income taxed at a low rate, while the borrower would be able to lower its taxable income by deducting interest payments, Willens says.
As for companies' aversion to paying the repatriation tax, a 2007 study by C. Fritz Foley, an associate professor at Harvard Business School; Jay C. Hartzell and Sheridan Titman, both of the McCombs School of Business, and Garry Twite, of the Australian National University, found that companies subject to above-average repatriation rates hold a median 47% of their cash abroad. Those subject to below-average rates keep only 26% overseas.
TO THEIR CREDIT, REGULATORS have started pushing companies to reveal more about their cash. The Securities and Exchange Commission staff sent comment letters to a number of U.S. companies, including Microsoft, earlier this year, asking them to disclose in their financial filings the amount of cash and short-term investments held by foreign subsidiaries. Recipients were asked to state in their filings that they would need to accrue and pay taxes if the cash were repatriated. Additionally, they were asked to state whether they intended to repatriate the money. Microsoft has provided more detailed disclosures this year.
The regulatory initiative is significant because companies might appear to have significant cash available on their balance sheets for dividends, investments, share buybacks and such. But if much of that cash resides in foreign subsidiaries, it can't be used for dividends or stock repurchases without triggering the repatriation tax. In a report to clients last spring, David Zion, an analyst at Credit Suisse, suggested discounting large cash balances if they're held abroad to adjust for repatriation taxes.
Investors often reward companies that have ample cash, without always knowing whether the money is unencumbered and safely invested. Understanding the risks is increasingly important, now that the world has grown more dangerous and Corporate America's cash stash has grown so large.
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