Illustration by Mike Forbush

Illustration by Mike Forbush

A recent Moody’s report puts tech firms atop the list of corporate cash-hoarders

Let us suppose that Apple, the world’s largest company by market capitalization, wanted to enter the pharmaceutical market. To do so, Apple could buy Pfizer, but that would come at a steep cost — Pfizer’s market cap is about $206 billion. No problem for Apple, though. The iPhone maker has enough cash on hand to buy Pfizer outright — and still have nearly $10 billion left over.

Apple’s $215 billion checking account is an extreme example, but a recent report from Moody’s made clear that other tech firms have followed suit in hoarding cash. Among nonfinancial companies that the credit-rating firm monitors, Apple, Microsoft, Alphabet, Cisco, and Oracle topped the list of those with the most cash on hand.

“Large tech companies have efficient cash flow models,” said Richard Lane, senior vice president of corporate finance for Moody’s. Their revenues are enormous, and tech companies spend less on capital investments than do other firms. Microsoft doesn’t make expensive items like, say, vehicles, so it doesn’t have to spend money on factories and components like Ford does.

That tech Top 5 held 30 percent of all corporate cash in 2015 among the companies Moody’s rates; the tech sector as a whole accounts for 46 percent — a whopping $777 billion stockpile.

Some of that cash is being circulated. Acquisition spending among Moody’s-rated companies jumped from $280 billion in 2014 to $401 billion last year, fueled in part by tech’s M&A inclinations. But the vast majority cash sits unused in part because of where it is located.

Of the $504 billion in cash held by Apple, Microsoft, Alphabet, Cisco, and Oracle, 86 percent is stored overseas. Part of that is due to international commerce, but much of it is done through intricate, and legal, financial maneuvers to shield profits from U.S. taxes. A December report by The Seattle Times showed how Microsoft revenue pings around the globe to holding companies in Puerto Rico, Bermuda, and Ireland to avoid domestic taxes. In 2015, $96 billion of Microsoft’s $102.6 billion in cash was held offshore. And once that money has settled in another nation would be subjected to a 35 percent tax if brought home.

“There are practical limitations to how that cash can be deployed,” Lane said. “If it’s brought back to the U.S., those companies have to pay fairly meaningful taxes on the cash. That’s a significant reason why the offshore cash values continue to grow.”

It’s impossible to know exactly how much money is stored overseas. Unlike the aforementioned firms, most companies aren’t inclined to share how much of their cash is held in foreign coffers. Nevertheless, Moody’s estimates total cash held overseas is significant: $1.2 trillion of the cumulative $1.6 trillion in corporate cash.

Unless tax reform simplifies and reduces corporate taxes, Lane said, it’s unlikely companies will reverse the offshoring trend. There are negative implications for companies that engage in this financial behavior, though. As most capital expenditures and M&A activity happens domestically, companies run the risk of depleting their U.S.-held cash, forcing them to dip into foreign accounts, thus subjecting them to said taxes. “You can actually have a situation where a technology company has a lot of cash, but is domestically cash-poor,” Lane said.

Because of the tax penalties, companies are increasingly issuing debt bonds to finance domestic expenditures. “Given the companies’ credit profiles and access to capital markets, they can borrow money at 2 or 3 or 4 percent,” Lane said. “They’d rather pay that pre-tax as opposed to paying (35) percent just to bring cash back from offshore.”

It’s for this reason that debt financing amounts among Moody’s companies has risen nearly as quickly as aggregate cash. From 2007 to 2015, total cash reserves swelled 122 percent while the net debt of those companies jumped 92 percent.

This dynamic played out last month when Microsoft announced its plans to purchase LinkedIn. Even though it has more than $100 billion in the bank, Microsoft will borrow the $26.2 billion LinkedIn tab. It’s a deft maneuver, one that will save Microsoft more than $9 billion on its next tax bill.

This article originally appeared in the July 2016 issue of “425 Business.”