Apple’s Little Cash Problem

Apple Pay doesn’t work on Twitter, so don’t even ask. Apple does not have enough cash to buy Twitter and still operate its business. We all know Apple has lots of cash, which is mostly overseas, but Apple has little cash here, in the United States.

Apple’s cash stash is part of its EU tax problems. Apple – like other Silicon Valley companies – transfers intellectual property to foreign subsidiaries. In this case, Apple then makes royalty payments to foreign subsidiaries for use of the intellectual property. Apple’s royalty payments transfer cash overseas and also reduces its U.S. tax bill.

Apple tax strategy has stashed about $214 billion overseas or 93% of its total cash. This means Apple had only $18 billion of cash left in the United States as of June 2016. So Apple does not have enough money to do large U.S. acquisitions. It does have money to do “small” acquisitions such as the purchase of Beats Audio for $3 billion in 2014 or overseas investments such as Didi.

image-1

Lots of taxes will be paid if Apple brings the cash back here. But with so much cash, activists pressured to Apple return it to shareholders. So starting in 2012 and until of June 2016, Apple has return about $172 billion in the form of stock repurchases and dividends. Apple has gotten the cash from issuing debt, so the overseas cash, stays overseas.

Maybe this why Buffett’s Berkshire Hathaway purchased Apple’s stock for $1  billion or $109 per share early in 2016.  Berkshire bought the Apple not for the “product pipeline”, but for the cash. Apple’s Board recently raised to the annual dividend to $2.20 per share and increase the amount committed to stock repurchases.

 

Harvard Defeated by Unicorns

Venture capitalists shouldn’t be blamed for Harvard’s loss to Yale and Princeton. No this isn’t football, but it’s the season of the year when Ivy League Endowments release their annual returns and Harvard hasn’t been beating the second and third largest endowments. Harvard loses – as seen below – because it hasn’t fully participated in the rise of the unicorns.

endowment-returns-image
Source University Reports

Back in the early 1980s, Yale Endowment’s David Swensen began investing in private equity assets, such as venture capital and leveraged buyouts, and away from traditional stocks and bonds. Over the years, David Swensen taught others the “Yale Model”, including Andrew Golden who now manages the Princeton Endowment.  As seen in the graph below, private equity makes up more of the endowments’ of Yale and Princeton, than Harvard.

private-equity-allocation-image
Source University Reports

Private equity allocations can grow from additional investments, but also from unrealized gains especially in venture capital assets. Princeton in FY 2015 reportedstrong performance within our venture capital portfolio (that) further boosted” returns of its private equity assets to 21.8%. Yale devoted its FY 2015 annual report to its venture capital investments which had a twenty year weighted return of 32.3%.

Harvard has also benefited from venture capital. For FY 2015, Harvard reported increased returns in private equity were due in part to “the strong performance of 29.6% produced by our venture capital investments.” But Harvard loses because the endowments of Princeton and Yale include more private equity assets and thus have benefited from the recent rise of unicorn valuations.

Unicorns and endowments returns are somewhat works of fiction. Endowments returns are based on limited partner financial statements provided by the venture capital firms. These firms use different methods to value portfolio companies since public market prices don’t exist. So the valuations and hence endowment returns are more estimation, than reality.

Unicorn valuations may also be fantasy. For FY 2015, Harvard Endowment’s former investment manager, Steve Blyth, wrote that:

Venture capital continues to receive ample funding, and private company valuations are also bolstered by public mutual funds entering late stage funding rounds in significant size. This environment is likely to result in lower future returns than in the recent past.

Harvard, Yale, and Princeton have yet to fully report on their endowment for FY 2016. But in the long run, Harvard may still win if unicorn prices don’t materialize along with the paper gains of venture capital portfolios.

 

Yahoo’s Verizon Tax Bill

download

Last month, Yahoo announced the details of its sale to Verizon in a proxy statement.

Kara Swisher, of Recode fame, said of the proxy:  “It’s a pretty dry document, written by lawyers for lawyers about how shares will be distributed and what goes where”.  Yet for Yahoo investors, the proxy told more: the taxes dues from the sale.  

The  sale was a workaround to separate Alibaba stock in tax efficient manner as stressed by Jeffrey Smith of Starboard Value. The first method attempted was a tax free spin-off of the Alibaba shares to shareholders.

After the IRS blocked that pass, Starboard encouraged the reverse: sell the operating business and leave investors with the Alibaba stock.

As reported, Verizon will pay $4.8 billion in cash to Yahoo for stock in a subsidiary holding the operating business. To Yahoo, the stock is worth $4.1 billion. So the taxable gain from sale was $700 million.

Yahoo will owe $287 million in State and Federal taxes, after slapping estimated tax rate of 41% on the $700 million gain. The remaining cash of $4.5 billion will go to the existing shareholders of Yahoo.