At its most recent earnings report, eBay (NASDAQ: EBAY ) announced that it would be repatriating the vast majority of its overseas cash and that, in doing so, would face a $3.0 billion tax charge in order to actually bring that cash home. Most companies that do significant business overseas often keep the profits generated outside of the U.S. in foreign subsidies in order to avoid paying taxes on that income. The good news is that this boosts net income by lowering the company's effective tax rate, but the bad news is that when/if the company needs that cash to come home (usually for capital returns programs and/or acquisitions), things can get a little messy.
Most companies do it with debt
An "easy" way to effectively repatriate foreign cash without paying the full tax bill upfront for that money is to issue debt. While debt isn't free because the company needs to pay the principal back at some point with interest along the way, it's often the preferred method to "bringing home" cash when the debt is ultimately cheaper than paying the taxes on that cash. Apple (NASDAQ: AAPL ) , for example, did this last year and, again, this year, raising about $29 billion in debt during the last two years to fuel buybacks.
But eBay didn't issue any additional debt for its needs, which include both capital return and potential acquisitions; instead, it decided to take the tax hit on the foreign cash. eBay is an extremely well-run company, and there is no doubt that the finance folks at the company considered both debt and repatriation and, at the end of the day, they chose to simply bring back the cash, tax hit and all. The question, then, is why?
eBay likely wants to maintain its credit rating
On the call, Sanjay Sakhrani, from KBW, asked management explicitly why the company chose to repatriate the cash rather than simply issue debt. The answer didn't really offer much guidance, but management did mention in passing the company's "desired credit rating." Digging further into this, eBay CEO John Donahoe made a statement back in February of this year that the company could take on more debt, but only if it could maintain its "A" credit rating.
The company already has about $4.12 billion in debt, which isn't an excessive amount, but it would make taking on an additional $9 billion in debt difficult if it wanted to maintain its credit rating. The repatriation of that cash is going to be expensive but, in the context of the CEO's statements and the company's priorities, this seems to be eBay's best option given that it needs significant cash domestically to fuel additional share repurchases and potential acquisitions.
Your credit card may soon be completely worthless
The plastic in your wallet is about to go the way of the typewriter, the VCR, and the eight-track tape player. When it does, a handful of investors could stand to get very rich. You can join them -- but you must act now. An eye-opening new presentation reveals the full story on why your credit card is about to be worthless -- and highlights one little-known company sitting at the epicenter of an earth-shaking movement that could hand early investors the kind of profits we haven't seen since the dot-com days. Click here to watch this stunning video.