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What's New
Apple's cash conundrum
Private exchanges and budget certainty Also Noted: News scan: Foreign bribery, product liability, and much much more and much more... News From the Fierce Network:
1. More on Bank of America settlement
2. New online "dating" service of hedge funds
3. Broker dealers unfairly blamed for credit crunch
Today's Top News Apple's cash conundrum
There's still more to say about Apple's cash, as Felix Salmon weighed in yesterday on the debate the previous day at the WSJ. Salmon argues that Apple would be crazy to take on a lot of debt to push cash to shareholders. We're sympathetic to that view, since financial engineering is a one-time event and largely an illusion. And as we've said, the $147 billion commonly considered Apple's cash isn't purely cash or equivalents but includes mostly long-term investments, probably including equity, so the company is likely to be earning more on that than just a few basis points. And given the company's track record of innovation, it makes more sense to have cash on hand for R&D than to borrow. That would be in line with finance theory, as I wrote about in Global Finance. The thinking, mostly recently expressed in a paper by the highly-regarded Ohio State University finance professor Rene Stulz, is that companies that develop significant intangible assets through R&D are smart to keep cash on hand for the purpose, since its cheaper than borrowing for a purpose that investors consider risky and therefore demand a premium for, even at Apple and in the current environment. "A detailed analysis shows that the increase in cash holdings of multinational firms is intrinsically linked to their R&D intensity," Stulz and his co-authors wrote. And yes, maybe Apple doesn't need quite as much cash on hand as it has. But a significant amount of it is tied up abroad, and the company has gone to great lengths to avoid paying tax on it, coming for a great deal of criticism in Congress for doing so, as I also wrote about at Global Finance. Why ask for more? In theory, there's no tax issue in borrowing to finance buybacks when most of one's cash is kept abroad. In fact, Apple has already done so, as have Microsoft and Intel, without raising any questions from the IRS. Yet there's a bit of magic involved in the process, as Jasper Cummings, a former associate chief corporate counsel at the IRS now with the law firm of Alston & Bird in Durham, N.C., explained in an email to FierceCFO. As Cummings described it, Apple should get no grief from the tax authorities as long as it doesn't use cash held by so-called "controlled foreign corporations" to pay back the bonds. "If Apple does not pledge CFC stock and the CFCs do not guarantee the bonds, and the investing public is willing to trust Apple to pay the debt, then there has been no repatriation," he wrote. But note his line about the investing public's trust. With so much of its cash abroad, how would Apple pay off the debt used to finance buybacks without repatriating some of its cash or keeping more of it in the U.S. going forward, and thus paying tax on it one way or another? Cummings pointed out that the cost to the company could be minimal even if it didn't keep enough profit in the U.S. to repay the debt. For one thing, he noted, Apple borrows at low rates and can deduct the interest cost. For another, he said, a buyback would increase the price of the stock, giving the company more valuable currency with which to make acquisitions. Also, Cummings said, the debt could be convertible, in which case Apple wouldn't have to repay the debt. In addition, he noted, there's a good chance that corporate tax rates will be lower by the time the company did have to repay it. In any case, Cummings noted, "Apple evidently does not pay much tax anyway, so a little more won't hurt." For more:
- see this Reuters blog post
- see this Global Finance article
- see this Global Finance article
- see this working paper Related article:
Most of Apple's "cash" may be invested in technology Read more about: Apple, R&D
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Private exchanges and budget certainty
Amid the hubbub about the public health insurance exchanges mandated by the Affordable Care Act, private exchanges seem to be gaining a foothold among employers. Companies that use private exchanges provide employees with a set amount of money and send them to the exchange, which offers a range of plans, to select their health coverage. A number of new private exchanges have sprung up in the last couple of years, including offerings from HR consultants Aon Hewitt, Buck, Mercer and Towers Watson. Mercer said 52 companies, including Kinder Morgan and Petco, signed up to use its exchanges in 2014, and Aon Hewitt said 18 large employers, including Walgreens, and more than 600,000 employees and family members would be covered by its exchanges next year. A Benfield Research survey of employers with 5,000 or more employees showed 40 percent may use private exchanges for active employees in 2018 and beyond. Budgeting certainty is advertised as one of the main benefits of private exchanges, since the company knows at the start of the year how much it is providing the employee toward his or her coverage. In fact, private exchanges have been dubbed the defined-contribution approach to health care. But newer exchanges, such as Towers Watson and Mercer, are offering companies both fully insured and self-insured group coverage. (Aon Hewitt offers only fully insured.) Self-insured employers pay all their employees' health claims, although they may limit their exposure with stop-loss insurance, an arrangement that seems to blow a hole in that defined-contribution label. Chris Calvert, health practice leader at Sibson Consulting, said companies that self-insure will calculate their health care costs based on their past experience and then decide how much to pass through to employees. "If you're off drastically, the next year you're going to adjust the rates to adjust for that," Calvert said. Even under the fully insured model, health insurers reprice premiums based on the group's experience the prior year, noted Scott Thompson, president of the health care practice at Benfield Research. Thompson said that competition for employees is another key factor in costs. "Even if prices are stable, if the competition has a nicer benefit package, you may have to increase your contributions" to match that package, he said. As companies look for ways to contain steadily growing healthcare costs, there's also the argument that the competition among insurers for employees' business on exchanges will help limit cost increases, although there's some debate about which model best fosters competition. "Aon Hewitt will tell you the fully insured model is about competition for these individual markets," Thompson said. "They think that's what's going to moderate or slow prices between health plans. Self-insured proponents tell you they can do the same competitive process in their bidding process."
"That's the big question, will these things drive cost savings and we don't know the answer, yet," Thompson said.
But large companies may see other advantages to the arrangement. With private exchanges, big employers "can truly offer a variety of plans and carriers without having to take on expensive administrative complexity," Calvert said. "I think the private exchange model is here to stay," he added. For more:
- see this Businessweek story
- see this Reuters story
- see this Hartford Courant story Read more about: Petco, Walgreens
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Also Noted >> Compliance: Bribery gets expensive Avon's stock fell 22 percent on news that the government's foreign bribery investigation would result in a much more onerous penalty than investors evidently expected. The company said the likely fine would be larger than expected by "an order of magnitude." Avon has already paid roughly $340 million in legal and related costs to deal with the inquiry under the Foreign Corrupt Practices Act, which started in 2008. Read more >> Compliance: So much for limited liability? A case involving defunct Maxfield & Oberton Holdings would break all legal precedent by holding its former chief executive personally responsible for the $57 million cost of recalling a magnetic product, called Buckyballs, that was deemed unsafe to children. Lawyers say it would be unheard of to do so when no legal or regulatory issues are involved. The company went out of business last December, citing the cost of fighting the administrative action by the Consumer Product Safety Commission. Read more >> Capital: Another blow against method patents A court decision against Sequenom is a sign that the Supreme Court's decision last June that human genes could not be patented could make it more difficult to patent diagnostic techniques. More broadly, the ruling is in line with attempts to roll back patents for business methods, which critics say involve art that is obvious. Sequenom's stock fell 23 percent after a federal district judge in northern California issued her ruling against the company's central patent for a noninvasive method of detecting Down syndrome in fetuses without the risk of inducing a miscarriage. Read more >> Capital: More questions about Google's patents A move by Rockstar, a consortium backed by Apple, Microsoft and other tech firms that outbid Google for bankrupt Nortel's thousands of patents for $4.5 billion in 2011, raises fresh questions about the value of Google's Motorola Mobility patents. The latter, which Google bought in 2011 and valued at $5.5 billion a year later, was supposed to protect Google against cell phone patent suits, as we discussed on Monday. But Rockstar has sued Google and other cell-phone manufacturers for violating its Nortel patents. Read more >> Compliance: Fallout from the Infosys visa case Federal agents are investigating other companies suspected of using short-term visas instead of more-difficult-to-obtain long-term ones to employ foreign workers, following action by the Department of Homeland Security against Indian outsourcing firm Infosys. The company agreed Wednesday to pay $34 million to settle federal allegations that it had engaged in visa fraud and kept inaccurate hiring records, the largest immigration penalty ever levied against a company. Read more >> Management: Why deflation remains a concern While the German and British governments pat themselves on the back for engineering an economic recovery by cutting government spending, the latest figures for consumer prices in the eurozone suggest such austerity measures have instead induced another recession. With prices rising at the slowest pace in four years, spawning fears of deflation, the European Central Bank is expected to cut interest rates. The euro fell by 0.4 percent in early trading today in anticipation of such a move. Read more >> Governance: ISS on the block CFOs are likely to breathe a sigh of relief at the fact that MSCI intends to sell Institutional Shareholder Services, a sign perhaps that proxy advisory firms are losing influence with shareholders. Or this development may be a reflection of ISS's particular difficulties, described as ranging from regulatory scrutiny and market headwinds to questions about its analytical models. Read more >> Technology: Turnabout fair play? Anyone else find it ironic that companies that gather so much data on consumers don't like it when others gather it on them? Read more Briefly noted: > Despite Libor scandal, not much has changed when it comes to corporate borrowing. Article > RBS plans to divest its U.S. arm sooner than planned. Article > Why the press should be included in IPO road shows. Article > Lack of U.S./EU harmony on derivatives threatens trade talks. Article > Crisis redux: The House repeals a Dodd-Frank provision that requires banks to trade derivatives through separate units not backed by federal insurance. Article > New CFO and investigations at Astra Zeneca. Article > Fannie Mae seeks $800M from banks over charges of Libor manipulation. Article > Microsoft co-founder Allen sees spinoff potential for the tech giant Article And finally… US government infrastructure spending collapses. > Get Subscriptions to the Leading Finance Magazines for FREE Mercury Magazines offers top Finance titles for Free to professionals. No Credit Card Required. Stay Ahead in your Industry. Sign up now. > Whitepaper: December 21st is fast approaching. Is your firm compliant? The swaps clock is ticking for mobile recording and your firm could be at risk for fines, penalties and reputational damage. Truphone is the only global provider – offering in-network mobile recording that seamlessly enables global compliance. 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