|Wed Apr 30 2014 13:11:47|
What Should eBay Do with $6 Billion in Offshore Cash?
By: Ina Steiner
Sixty percent of eBay Marketplaces revenue is made internationally, and eBay has been hoarding that cash offshore - it has close to $10 billion accrued. But in a surprise announcement on Tuesday, eBay said it would be taking a charge on its books to give it the flexibility to bring much of that money home.
eBay recorded a $3 billion charge taken on $9 billion of foreign earnings from prior years, meaning eBay is now free to use $6 billion in the U.S. (The $3 billion is on paper - eBay will write a check to the IRS when it uses any of that cash in the U.S. having now accounted for it on the books.)
Three billion dollars seems like a steep price to pay for $9 billion, but eBay has not been paying taxes on foreign revenue as it was earned.
Until Tuesday, eBay has been adamant that it would not make such a move for that very reason. When eBay CFO Bob Swan was asked in 2008 about bringing back its $3 billion offshore cash to the U.S., he said it would result in a "pretty severe tax rate penalty." (Analysts had been pressuring eBay to issue dividends and the company used that as a reason why it would not.)
eBay CEO John Donahoe referenced the policy reversal in the company's Q1 earnings release on Tuesday, saying, "Today, we also announced a non-cash tax charge to facilitate repatriation of $6.0 billion net in foreign earnings, increasing our available U.S. cash and enhancing our financial flexibility."
While several analysts asked eBay for more information about the decision, no one asked if the decision was due in part to pressure from activist investor Carl Icahn. But it seems rather coincidental that eBay would make such a sudden reversal and incur a $3 billion charge just after it got Icahn to back down from his proxy fight with the company.
In January, eBay announced its $5 billion stock repurchase authorization at the same time it disclosed the proposals it received from Icahn, who had at the same time been urging Apple to buy back shares of its stock.
eBay could use the cash in a number of ways, including the acquisition of U.S. companies or to help it execute its $5 billion share buyback program. eBay has already executed $1.8B stock buyback, leaving $3.8B authorization remaining for future repurchases.
On Tuesday, Bob Swan told analysts, "The reality is, we're seeing growing opportunities in the U.S." He mentioned the stock buyback and said eBay was executing aggressively. "Additionally, we're an acquisitive company, and we need to ensure we have the resources available to capitalize on targets that become available both domestically and abroad."
"Just to be clear," he continued, "we are not announcing any large, U.S-based acquisition, nor are we committing to finance our share buyback with offshore cash. What we are doing is ensuring we have the capital available for U.S. needs."
In addition to using the offshore cash to buy back the remaining $3.8 billion stock of its commitment or using it to purchase U.S. companies, eBay could use the cash to issue dividends to shareholders or it could invest the money in PayPal before spinning it off.
Donahoe has also been getting cozy with the Obama administration and serves on the President's Export Council. It's a stretch, but could eBay be promoting good citizenship (by paying taxes on foreign earnings) in an effort to influence the administration to ease trade restrictions?
What would you like to see eBay do with its $6 billion?
- Should it lower fees (it hinted fee changes could be coming, and while it wouldn't say which business might be the recipient - PayPal, eBay Enterprise or eBay Marketplaces - John Donahoe did mention he wanted to stem the decline in consumer-to-consumer auctions in Marketplaces).
- Should eBay/PayPal acquire other businesses - any ideas?
- Should it make improvements to eBay and/or PayPal, and if so what specifically?
Any other creative ideas on what eBay should do with $6 billion?