Magazine

The Cash Heads Home


It's a cash bundle that would have made Howard Hughes blush: As U.S. multinationals such as IBM (IBM) and Pfizer Inc. (PFZ) have extended their reach across the globe, they've built up a mountain of profits earned abroad -- as much as $750 billion, by some estimates. That's more than the annual economic output of Hong Kong, Ireland, and Switzerland -- combined. And up till now, they've kept all that moolah overseas, much of it in tax havens such as the Bahamas, Ireland, and Singapore to avoid the stiff 35% levy they'd face if they repatriated the funds back into the U.S.

But now it looks as if Corporate America is gearing up to bring a chunk of that cash home. Thanks to a provision in the corporate tax law enacted in October, Congress is giving multinationals the chance to repatriate profits earned before 2003 and held in foreign subsidiaries at an effective 5.25% tax rate. To qualify for that rate, the money has to be brought back to the U.S. before the end of 2005, and spent in ways that stimulate job creation and the economy.

As a result, economists are expecting as much as $300 billion to come washing ashore next year, as companies seize the chance to lock in at the ultralow tax rate. Outfits as varied as Intel (INTL), 3M (MRK), and Heinz (HNZ) expect to repatriate gobs of cash, potentially using it for everything from refurbishing aging plants and shoring up balance sheets to launching acquisition sprees. And while the injection is not expected to produce many jobs, it should provide a nice jolt to the economy and a lift for the stock market.

Robert Mellman, an economist at J.P. Morgan Chase & Co. (JPM), predicts the flood of money could boost gross domestic product growth by as much as a half-point in 2005, to 3.5%, on the strength of a pickup in hiring, research and development, and capital spending. "This was money that was going to sit abroad and never come back," says Mellman. "The U.S. is getting something for nothing."

So far, a handful of companies have indicated they expect to bring cash home. Food giant Heinz says it may repatriate $1 billion in foreign earnings. And drugmaker Johnson & Johnson is expected by analysts to use some of its $14.8 billion foreign hoard to finance a possible acquisition of Guidant Corp.

"DELIBERATELY SLOPPY"

But for the most part, companies are being cagey about their plans. That's because they're not sure what they will be allowed to use the cash for. As one congressional aide points out, the law "was deliberately sloppy" to give companies as much leeway as possible in how they spend their hoards. Execs say they are waiting for the Internal Revenue Service to release final rules in coming weeks that will spell out exactly what types of transactions qualify for the low tax rates. "The driver is how we can use that cash in the U.S. And that is still not clear," notes Merck & Co. chief financial officer Judy C. Lewent.

In the end, analysts believe companies will have great latitude to spend as they please. "Given the fungible nature of cash," says Greg Kelly, a federal policy analyst at Susquehanna Financial Group LLP, a Bala Cynwyd (Pa.) institutional brokerage and research firm, "who's to say which pocket the money's coming from?"

While companies aren't saying much, hints are emerging about what they plan to do. Stock buybacks seem to be high on the list, with Franklin Resources, a San Mateo (Calif.) mutual-fund firm expected by analysts to repatriate part of its $2 billion in foreign cash to fund share repurchases, and, if allowed, special dividend payouts. Standard & Poor's chief economist David A. Wyss believes such foreign-fueled buybacks could boost per-share earnings for the Standard & Poor's 500-stock index by two percentage points, to 7%. "It's coming at a time when the dollar is already down, so companies will be eager to recognize foreign profits," he says.

Others will use the money to get their fiscal houses in order. A J.P. Morgan survey of 28 multinationals revealed that 13 of them plan to use their proceeds primarily to clean up balance sheets. 3M Co. (MMM), for example, says it plans to repatriate roughly $800 million of the $6.2 billion it holds abroad: The money will go toward retiring debt, shoring up pension funds, or making acquisitions. And in the pharmaceutical sector, analysts believe Merck may bring back some of its $15 billion to help protect its sacrosanct dividend in the face of a mounting legal bill from the Vioxx withdrawal. Drugmaker Schering-Plough Corp. (SGP) says it may tap some of its $9.2 billion to meet the needs of cash-strapped U.S. operations.

Wall Street dealmakers believe that any moves to clean up balance sheets could lead to mergers. "This is just one more impetus for increased M&A activity," says Stefan Selig, vice-chairman of Banc of America Securities (BAC). Besides J&J, Oracle Corp. (ORCL) is expected to leverage its overseas cash to go after other software firms.

A SPARK TO BORROWING?

Moreover, some will do the opposite of cleaning up their balance sheets to take advantage of the tax holiday. Since many companies have already sunk past profits into illiquid investments such as manufacturing plants, Wall Street pros expect them to borrow funds against those assets to qualify for the ultralow rate. Krishna Memani, global group head of credit strategy at Credit Suisse First Boston (CSR), predicts that U.S. multinationals could sell as much as $50 billion in new debt in 2005 to repatriate profits. Ultimately, other bond-market mavens believe the total borrowing could run three to four times that sum.

Repatriating could pose a risk for some companies, though. Michael Levesque, a senior analyst at Moody's Investors Service (MCO), warns that abruptly cutting cash holdings -- even in a foreign subsidiary -- could trigger a downgrade among companies with shaky finances. "We've given credit for that cash," says Levesque. "There could be a negative ratings impact if they spend it on anything other than debt repayment."

For tech and pharmaceutical companies especially, the new cash could shore up R&D budgets. Allen Sinai, president and chief global economist of Decision Economics Inc., predicts R&D spending will increase by an extra $7 billion, to $10 billion, over the next two years as a result of repatriation. Already, Intel Corp. (INTC) has said it may tap some of its $6 billion to cover the cost of upgrading several aging chip factories this coming year, a costly process that's expected to run about $2 billion per plant.

And what about using some of the money to expand payrolls -- the stated intent of the law? Don't bet on it. With companies wringing ever-higher levels of productivity out of their current workforce -- and reluctant to take on the obligations that come with new hiring -- economists doubt that a repatriation of profits will lead to a wholesale hiring boom. Indeed, Sinai expects the repatriation rush to create just 118,000 jobs in each of the next five years -- far less than the 500,000 that politicians promised. But if this cash surge keeps the economy humming a while longer, that may be a trade-off lawmakers are willing to make.

Corrections and Clarifications

Re "The cash heads home" (News: Analysis & Commentary, Dec. 27): The graphic "Overseas stash" used data provided by the non-profit Citizens for Tax Justice, and was based on a methodology which included cumulative unrepatriated foreign earnings for companies that were profitable in the U.S. in the years 2001, 2002, and 2003. Companies that were not profitable in the U.S. were excluded, and we should have clarified that.

By Dean Foust in Atlanta, with Howard Gleckman in Washington, Amy Barrett in Whitehouse Station, N.J., and bureau reports


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