Apple has $200 billion to play with - here's what it might do with all its overseas cash
- Apple has around $250 billion in overseas cash.
- The new tax law put in place 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 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 might 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 U.S.
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 will 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," company 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 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 from 38% to 15.5%. However, 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 expects to pay $38 billion in taxes on its overseas cash. That amount implies the company had around $245 billion in taxable foreign holdings. If you take out the taxes, that would leave Apple with around $207 billion to play with.
What might a shopping spree look like
Many observers on Wednesday were quick to speculate about which companies Apple might acquire.
Video streaming service Netflix and 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 cap that Netflix and Tesla currently command, Apple could afford either, or both.
"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 mega-deal, 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 though. Apple has an active dividend and stock buyback program today that's 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 plans 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 plans to devote $10 billion of those capital expenditures 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 plans to expand a fund it created to boost suppliers who manufacture their products in the US from $1 billion to $5 billion.
Apple wasn't clear on just how much of its investments will come from its overseas cash
But it was unclear exactly how much of these investments will come from Apple's overseas cash stash as opposed to the cash it generates from its ongoing operations. Last year, Apple generated $64 billion in cash from its operations. Even if you subtract out the money it devoted to paying out dividends and buying up stock, it still had $18 billion left over.
It also was unclear exactly how much more Apple might be investing beyond what it already does on a regular basis.
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 spent more than $12 billion on capital expenditures in its last fiscal year.
And don't forget about its debt
Apple took on that debt in order 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.