Apple and Google use cash to buy...treasuries?(money.cnn.com)
money.cnn.com
Apple and Google use cash to buy...treasuries?
http://money.cnn.com/2014/03/13/investing/tech-bonds-overseas-cash/index.html
25 comments
Reading the news as of late, there seems to be a new narrative against the tech companies, as if they are the new Wall St. See the bus protests, gentrification protests, aren't involved in their communities, complaining they don't pay enough taxes (while some other companies, such as oil, are receiving tax subsidies), etc.
If someone can spin negative news against them, they will.
If someone can spin negative news against them, they will.
The article goes on to criticize American tech companies for not moving overseas funds here; this after they are being criticized for buying Government debt with the money they already have here.
I am at a loss.
I am at a loss.
The article hypothesizes that they are buying treasuries with their foreign cash.
Note that much of that foreign cash has already been taxed locally, so companies are weary to move it back to the states, especially if they can use it in the country where it was already taxed, or in other countries where it would be counted as foreign investment capital rather than income.
Taxes are freaking confusing with a lot of tax-twice situations, and I don't really blame companies for not wanting to pay taxes twice.
Taxes are freaking confusing with a lot of tax-twice situations, and I don't really blame companies for not wanting to pay taxes twice.
Indeed. Basic rule of wealth, rich people collect interest, poor people pay it. This creates different actual worth on each dollar used.
One who collects interest, well their dollars are actually bigger, sometimes double that of the interest payers dollars due to that very interest. Companies are smart to do this if they can and so are richer individuals, it is banking but it also fuels economies allowing access to money.
One who collects interest, well their dollars are actually bigger, sometimes double that of the interest payers dollars due to that very interest. Companies are smart to do this if they can and so are richer individuals, it is banking but it also fuels economies allowing access to money.
Additionally, increased demand for treasuries results in the US being able to borrow at lower rates, decreasing the interest paid.
This article is inane. The authors have no understanding of what it means to have large amounts of money.
Where else should companies store their billions of dollars in cash? You can't just store money in a bank, because that bank could go belly up, meaning there is a certain amount of risk. Having money in US treasuries is essentially the lowest risk you can get, and they are extremely liquid.
Where else should companies store their billions of dollars in cash? You can't just store money in a bank, because that bank could go belly up, meaning there is a certain amount of risk. Having money in US treasuries is essentially the lowest risk you can get, and they are extremely liquid.
Treasuries are often used as a "risk-free" asset to adjust a portfolio in order to meet a predetermined level of risk. Someone who works in finance can probably tell us more.
There the "risk free" aspect, but there also just really isn't much else in the world that you can buy 100 billion dollars of in just a few years. Even the entirety of taxable property in Manhattan can be had for just over twice that amount of money. Not to mention good luck trying not to move the market while buying 100 bn of anything.
Exactly. Treasuries are just so useful for stashing money. Even if the rate of return is below inflation, the Chinese really have no choice when dealing with their dollar reserves. Treasuries also make the dollar attractive in the first place, since the USA is more than happy to act as a debtor of last result resort....remember money can only be saved if it's borrowed!
Why Treasuries? Well, they're really liquid. You can sell them in a hurry if, for example, there's some juicy company you decide you want to buy for $19 billion. (As selectodude pointed out, they probably won't move the market much by doing so.)
This is an extraordinarily important point and one that nearly everyone misses. Treasuries are some of the most liquid instruments that exist, especially at shorter durations.
Given that:
1. Some publicly traded companies have been sued for not maximizing shareholder value.
2. Not utilizing all of tax exempt vehicles provided to them could be counted as not maximizing shareholder value, unless of course there is a better investment they can make with their cash pile.
3. Given inflation of 1.5%, $100 billions in cash that Apple has would be losing $1.5 billions per year in terms of buying power. So not investing it is paramount to loosing money.
I really do not see how can anyone can claim that companies are evil for doing this. They merely operate in framework set up for them.
This also raises interesting point that it would be illegal to try to repatriate gigantic cash supplies they have because that would definitely go against maximizing shareholder value.
1. Some publicly traded companies have been sued for not maximizing shareholder value.
2. Not utilizing all of tax exempt vehicles provided to them could be counted as not maximizing shareholder value, unless of course there is a better investment they can make with their cash pile.
3. Given inflation of 1.5%, $100 billions in cash that Apple has would be losing $1.5 billions per year in terms of buying power. So not investing it is paramount to loosing money.
I really do not see how can anyone can claim that companies are evil for doing this. They merely operate in framework set up for them.
This also raises interesting point that it would be illegal to try to repatriate gigantic cash supplies they have because that would definitely go against maximizing shareholder value.
There is no requirement that companies maximize shareholder value. At best you might be able to hold them to something in their charter, but generally lawsuits attempting this are thrown out pretty quickly, and even if it's not, except in cases of blatant mismanagement, it's difficult to prove that someone else there would done better with different decisions.
I know this meme is persistent, but it's really not true. If it were, you'd end up with ridiculous situations, like every company with a down quarter would be sued in an effort to get a windfall out of a loss.
I know this meme is persistent, but it's really not true. If it were, you'd end up with ridiculous situations, like every company with a down quarter would be sued in an effort to get a windfall out of a loss.
Agreed. One reference:
http://hbr.org/2010/04/the-myth-of-shareholder-capitalism/ar...
http://hbr.org/2010/04/the-myth-of-shareholder-capitalism/ar...
There is zero legal basis to sue a company for not maximizing shareholder value. A company does not have the legal obligation to maximize shareholder value.
Of course, anyone can sue for any reason, and I'm sure companies may have been sued over something as dumb as this, but they won't win, unless there is fraud/negligence involved. Not deciding to put money into alternative investments is not an issue of maximizing shareholder value.
Of course, anyone can sue for any reason, and I'm sure companies may have been sued over something as dumb as this, but they won't win, unless there is fraud/negligence involved. Not deciding to put money into alternative investments is not an issue of maximizing shareholder value.
But a share buyback has about 8x the predicted return.
Would require repatriation of money.
Not criticizing them, but if you're buying that many treasuries, it might be a good time to start paying dividends instead.
If you want to pay dividends with that money, you have to repatriate the money first.
I believe Apple recently started paying dividends. edit: Yes, as of 7/2012
Buying Treasuries is more trivially reversible when you encounter an opportunity that requires lots of cash than paying dividends is.
Repatriating money should be tax free or very minimally taxed. Granted it is nice to have investment in treasuries but most of this is a game to keep money untaxed overseas. So just let them bring it back and use it here, that money will go on to pay many more taxes, just not directly from that exchange.
>If these firms are buying U.S. debt with that money...>
...then it means these tech companies have not invented the tech necessary to grow the economy.
...then it means these tech companies have not invented the tech necessary to grow the economy.
Isn't that the whole point? If it were undesirable for the US to borrow money and pay interest on it, why would the US Treasury issue bonds? And if they are issuing bonds, does it really matter who buys them?