Microsoft (NASDAQ:MSFT) has a significant chunk of change in cash overseas. In this clip from the Industry Focus: Tech podcast, host Dylan Lewis answers a listener question about how U.S. tax laws would have applied if Microsoft had tried to use some of that foreign stockpile in its acquisition of LinkedIn (NYSE:LNKD.DL).
A transcript follows the video.
This podcast was recorded on June 17, 2016.
Dylan Lewis: We got a question from a listener related to the acquisition. The question was, "Microsoft has $100 billion in cash, most of its overseas. Would they pay taxes on the cash repatriated for the purchase of LinkedIn?" Reading through the announcement and the conference that Nadella did, they made it clear, they're going to finance this transaction through new debt. They're going to issue a new debt to finance all of this. The short answer is, the company isn't planning to use any cash for this deal, or, they're not using that existing foreign cash hoard for the deal, so that doesn't come into play here.
More broadly, in terms of how to think about that cash that's held abroad, if they were interested in using that money to fund activity in the U.S., they should have to pay taxes on it when they're repatriating, but there are companies that have found ways around doing that. And there's actually a really excellent article from Bloomberg -- it's a little dated, it's from 2010 -- it's called Dodging Repatriation Tax Lets U.S. Companies Bring Home Cash. Because it's a little bit old, the practices aren't going to be totally up-to-date. But I think this article gives you a really good sense of the incredible game of cat-and-mouse that goes on with offshore cash, and the people who are trying to enforce the tax laws, and the incredible financial resources that are put to circumventing them or avoiding them. There's always a huge difference between tax evasion and tax avoidance.
If you reach out to the show, we can send you that. Like I said, it's not totally up-to-date, so the practices might not be totally current, what companies are doing today. But it is an interesting look at this side of the tech space. And we'll probably do a show on offshore cash at some point in the future, because it's a very interesting topic.
Before we get off debt issuance all together, I read this morning that following the announcement of the deal, and the fact that it's going to be financed by debt, Moody's said that they'll be placing Microsoft's AAA credit rating under review, and there's a possibility that it could be downgraded. Which is shocking to me. There are three, at the moment, businesses that have AAA credit ratings -- Microsoft, J&J, and I'm blanking on the third. Daniel, can you help me out?
Daniel Sparks: I'm not sure.
Lewis: I know Exxon recently suffered a downgrade. But, this revision or under-review nature of the credit rating is not a reflection of the deal itself. This is something that gets triggered by the debt-to-EBITDA ratio that the company maintains. You'll see this play out over the next month or two, but don't be surprised if you see this happen. This is something that's been flag-posted.