eBay's Repatriation of Overseas Cash Was the Wrong Move

E-commerce giant eBay (NASDAQ: EBAY  ) just posted strong results for the first quarter. Its earnings confirm it maintains a strong business and is clearly capitalizing on the boom in online commercial activity, primarily through its massively successful PayPal segment. In addition, the company is effectively monetizing its mobile user base, and these conditions are expected to result in solid growth this quarter as well.

However, shares of eBay sold off in after-hours trading upon the release of results. That's because, along with its quarterly report, eBay curiously revealed it brought back $6 billion of overseas cash and paid a hefty tax charge to do so. This resulted in a net loss for the whole quarter. The company may have been better off issuing debt to finance its capital allocation program, like other technology companies are doing these days.

Taking the repatriation route
The company decided to bring back some of its offshore cash to the United States and incur the resulting repatriation tax that so many other companies loathe. This places eBay in a unique position, because most other large technology companies with boatloads of overseas cash take alternative routes to increase value for investors.

Most other technology companies decide to not repatriate that money and pay the resulting tax burden. Instead, they often issue debt. For example, Apple (NASDAQ: AAPL  ) just offered up $12 billion in bonds, and that's after a $17 billion debt sale last year. It plans to leverage its pristine balance sheet and AA+ credit rating to return a grand total of $130 billion to investors through combined share repurchases and dividends.

Likewise, Cisco Systems (NASDAQ: CSCO  ) sold $8 billion in bonds last year and used the proceeds to return cash to shareholders. Cisco repurchased $4 billion of its own shares in the most recent quarter, with more than $12 billion remaining in its existing share-repurchase authorization. At the end of the last quarter, Cisco had $47 billion in cash and equivalents on its books, representing nearly 40% of its market capitalization.

Rather than issue debt to finance share repurchases and thus avoid repatriation taxes like most other technology companies, eBay is going to bring $6 billion of its overseas cash back to the U.S. Unfortunately, the company took a $3 billion tax charge in the first quarter that resulted in a net loss for the period.

Going forward, eBay plans to aggressively execute its existing $5 billion share-buyback program. In the first quarter, eBay bought back $1.8 billion of its own shares, so it's clear management is firmly intent on returning cash to shareholders.

Solid results across the board
At the same time, eBay's underlying business did well overall in the first quarter. It posted 14% revenue growth and 11% non-GAAP earnings growth. Strong results were driven by the robust e-commerce market and 19% net revenue growth at PayPal. The company realized 24% growth in commerce volumes, which hit $58 billion in the first quarter. Strength in mobile activity is accelerating as well, as users are rapidly adopting eBay on their mobile devices. To that end, eBay's mobile volumes soared by 70% and now make up 19% of overall activity. It has now had more than 240 million mobile downloads.

These conditions are expected to continue and result in further growth in the current quarter. Management expects about $4.4 billion in revenue this quarter, or approximately 12% growth, year over year.

Management better off issuing debt
The company's decision to repatriate its overseas cash and fork over such a huge amount of it in tax penalties is a curious one. The desire to reward shareholders with buybacks is understandable, given the fact that technology companies are flush with cash. However, other technology companies like Apple and Cisco face the same predicament but are instead issuing debt to finance their share buybacks and aren't forcing such huge tax penalties on themselves.

Selling debt makes sense for eBay as well, since it's got a very strong balance sheet to borrow against. It has more than $13 billion in cash and short- and long-term investments on its books, with only $4 billion in long-term debt to worry about. In such strong financial condition, eBay could have likely issued extremely low-cost debt to fund its share repurchases and saved itself from the pain of the hefty tax charge.

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