Here’s a math problem: what does this sentence, from John McCain, tell you?
“Apple claims to be the largest U.S. corporate taxpayer, but by sheer size and scale, it is also among America’s largest tax avoiders,” he said in Monday’s pre-hearing comments.
The answer, of course, is that Apple is among the most profitable companies in America.1 If you have a lot of profits, you can not pay taxes on a lot of them, and still pay lots of taxes on a different lot of them. There is much focus on the exceptions, but for the most part I’d guess that “biggest taxpayers” and “biggest tax avoiders” are both highly correlated to “biggest profits.” Warren Buffett pays more taxes than his secretary, but at a lower rate.
The Senate, not being known for its quickness with math, is holding hearings today on the avoiding part; here you can read (pdf) the committee’s report. Apple does two main things to avoid taxes that the committee doesn’t like:
- It incorporated two of its main foreign subsidiaries, Apple Operations International (AOI) and Apple Sales International (ASI), in Ireland. Those subsidiaries are, however, managed and controlled in the U.S. by their California-based directors. The U.S. taxes corporate income based on place of incorporation; Ireland taxes corporate income based on place of management and control. So if you’re incorporated in Ireland and managed and controlled in the U.S. you pay taxes nowhere, as AOI does and ASI more or less does. This is … honestly isn’t the surprise that everyone doesn’t do this?2 I’m incorporating myself in Ireland as we speak.
- It entered a cost sharing agreement that gave ASI the economic rights to Apple intellectual property outside of America, in exchange for ASI funding a share of Apple’s California-based R&D proportional to its share of Apple’s total sales. Apple is in the business of manufacturing cheap electronic components in China, slapping expensive cool on them in California, and selling the package for $500. ASI effectively got the California cool at cost, rather than paying retail, which means that the international share (some 60%) of the profits of that cool are, for tax purposes, “earned” abroad (in a zero-tax subsidiary!) rather than in California.
Well someone today did an entirely non-imaginary debt offering to fund a stock buyback so bully for them. Should we look at some things Apple’s debt deal is bigger than (most of them!) and other things its yield is smaller than (also most of them!)? I guess that’s a thing, I don’t know. It’s a big bond deal, but still, one should keep it in perspective. Apple sold more bonds than iPods, yes, but fewer bonds than iPads. This is not the category killer that iPrefs could have been.
That’s 5-10bps outside of where Microsoft priced last week. The deal seems to have been multiple times oversubscribed; presumably some buyers whose orders don’t get filled will console themselves buying Facebook shares or something. Read more »
If David Einhorn Pulled The Same Stunt On GE That He Pulled On Apple You Can Bet He’d Be Receiving A Western Union Telegram From Grandpa Welch Telling Him To ‘Knock It Off’By Bess Levin
Former General Electric CEO Jack Welch says Apple deserves better than the treatment it’s getting from David Einhorn, the hedge-fund manager pressuring the iPhone maker to cough up dividends. “Look, these guys are after a quick hit. I’d blow him off,” he told CNBC’s “Closing Bell.” “I’d give Einhorn the back of my hand.” Welch said he had the same kind of problem with activist investors while heading GE. “They’d come after us, ‘What are you going to do with all that cash?’ Well, we’re going to do a smart thing! Trust us!” Welch said. [CNBC, related, related]
So David Einhorn won his lawsuit against Apple today, which means that Apple will be forced by a court order to issue $236 billion of “iPref” 4% perpetual preferred stock next week, which I currently see bid at 4.06% in the gray market for $10 million lots.
Hahaha no of course it doesn’t mean that. It means nothing! Except that everyone is kind of peeved. There are some things you could say against Calpers corporate-governance guru Anne Simpson’s position on Apple/Einhorn, but she’s not wrong about this:
“I came off the call deeply puzzled,” Anne Simpson, the pension fund’s director of global governance, told DealBook in an interview after [yesterday's Einhorn] call [pitching iPrefs]. “He finished off by saying you should vote against Proposal 2 to send a message, but he’s in court trying to prevent Proposal 2 from going ahead.”
Right? Read more »
I used to work on sort of a cats-and-dogs capital markets desk, which occasionally meant that spivvy companies without great access to the equity and bond markets, or industry bankers who were a bit too clever for their own good, came to me and asked “hey, what if we issued preferred stock?”1 I cannot recall that ever working out well. “Preferred stock” is a thing that exists in corporate finance textbooks, and occasionally solves for quirky corporate finance equations (“can we structure this investment as debt only it isn’t debt …”), but its practical uses tend to be limited to:
- private companies, private investments in public companies, joint ventures, VC investments, and other non-publicly-traded things;
- convertible preferred stock, which is not really the same thing at all;
- convertible preferred’s weird Warren-Buffett-and-TARP cousin, “preferred stock with warrants”; and
- a couple of sectors that are really into leverage, capital-structure engineering, and retail financing – meaning mostly banks, insurance companies and REITs.
So David Einhorn’s too-clever-for-his-own-good “iPrefs” deck brought back fond memories: why not convince a tech company that the next level of financial-engineering innovation is to issue preferred stock? And, since the phrase “preferred stock” does still kind of conjure up turn-of-the-last-century financial markets and/or cheesy cologne, why not rebrand it as “iPrefs”? There is something … something very investment-banker-y about taking an absolutely standard financial product, giving it a different name, and calling it an innovation. Of course I love it.
The only thing I love more than the name is the ambition. Read more »
So there’s this fight over what Apple should do with its money and I think it boils down to:
- Lots of people think that Apple is undervalued,
- Some of those people say: “so, since the market undervalues you, a dollar in your hands is valued less than a dollar in shareholders’ hands, and since you have Just. So. Many. Dollars. in your hands, why not give some back to shareholders, like in the form of colossal dividends, or even more amusingly in the form of tens or hundreds of billions of dollars of preferred stock?”
- Others say: “no, the market’s valuation is irrelevant, you should stealthily keep investing your zillions of dollars into building wrist computers or whatever, and one day your stock will catch up.”
If these arguments sound familiar that’s because they are; you can pretty much always find an activist who thinks that a company should return cash to shareholders feuding with a management who thinks they should be investing that cash in growing the business. And they’re endless because they’re tough to adjudicate: everyone is sort of talking their own book. There is a pile of money, and some people say “we should have the money,” and others say “no we should have the money,” and, y’know, duh they’d say that. Are return-the-cash activist shareholders just greedy short-termers destroying long-term value? Are managers who prefer to invest the cash just blinkered empire-builders who don’t care about the welfare of the people actually funding their wrist-computer adventures?
I dunno. Here are some hypotheses: Read more »
“It is kind of like my grandma Roz. She wanted to hoard money. She would not leave me a message on my answering machine because she did not want to be charged for a phone call. It is really hard to convince somebody with that mindset to change what they’re doing. We have come up with what we think is a win-win situation for Apple where Apple gets to keep its war chest, they get to keep the money, they get to have it for bad times, for growth, for acquisitions.”[Bloomberg TV, earlier]
David Einhorn is suing Apple to make them give shareholders a separate vote over whether shareholders should have a vote over whether Apple can issue preferred stock. I guess that requires some unpacking. Let’s start at the end, with the preferred stock. Here is Einhorn’s plan:
For example, Apple could initially distribute to existing shareholders $50 billion of perpetual preferred stock, with a 4% annual cash dividend paid quarterly at preferential tax rates. … Assuming Apple retains its price to earnings multiple of 10x and the preferred stock yields 4%, our calculations show that every $50 billion of perpetual preferred stock that Apple distributes would unlock about $30 billion, or $32 per share in value. Greenlight believes that Apple has the capacity to ultimately distribute several hundred billion dollars of preferred, which would unlock hundreds of dollars of value per share. Further, Greenlight believes additional value may be realized when Apple’s price to earnings multiple expands, as the market appreciates a more shareholder friendly capital allocation policy.
What do you think? I vote yes. (I mean, I think it’s a good idea. The voting is more complicated.) My math is here and ties closely to Einhorn’s:
The math is super straightforward though it can and should boggle you conceptually if you think about it. Read more »
Rochdale Securities LLC, the 37-year- old brokerage that employs bank analyst Dick Bove, is seeking a capital injection after a trading error, said three people with knowledge of the firm’s situation. Executives at Rochdale are telling employees and potential investors that a trader at the firm made an unauthorized purchase of Apple shares, which has eroded the capital of closely held Rochdale, said one of the people, who declined to be identified because the overtures have been private. [Bloomberg]