While US Workers Suffer Over 22.5% Unemployment Large US Companies Are Sitting On A $1 Trillion Dollar Cash Hoard In Other Countries

The Trillion-Dollar Challenge
By ERIC J. SAVITZ | MORE ARTICLES BY AUTHOR
Fear of taxation prevents U.S. companies from bringing in some of the $1 trillion-plus held overseas that could help fuel an economic rebound.
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SOMETIMES LOST IN THE ONGOING hoo-hah over the vast sea of cash on tech-company balance sheets is the fact that a lot of it sits outside the country – for all large U.S. companies, the total is somewhere north of a $1 trillion. That by itself wouldn't be a big deal, if the money could easily be shifted back home. But for practical reasons, it can't. Under current rules, repatriated cash is subject to paying the difference between the low tax rates in foreign jurisdictions and the higher corporate levies here.

Earning all that cash overseas has plusses; for one thing, it reduces the effective tax rates for many U.S. companies. But it also leaves them holding a vast pool of money that can't easily be put to work in the States. That irritates the heck out of some people, none more so than Cisco Systems (ticker: CSCO) CEO John Chambers. The gentleman farmer of the tech set, Chambers, with his charming Southern drawl, has become a vocal campaigner about the need to change the rules — not too surprising, given the $30 billion his company has outside the U.S., about 75% of all that it has in the bank. Chambers makes a convincing case that the rules on cash repatriation should be changed. Making it attractive for U.S. companies to bring home their foreign cash, he contends, is an easy way to give the economy a boost without Uncle Sam kicking in a penny.

Chambers made his case during a presentation to financial analysts last week at Cisco HQ in San Jose. Actually, he tied the issue to what turned out to be the big news of the day: An hour into his talk, Chambers announced that Cisco intends to accede to the Street's wishes (see last week's Tech Trader and this week's Speaking of Dividends), and will start paying a dividend in its current fiscal year, which ends in July 2011. Chambers said that Cisco will offer a 1%-2% yield.

Chambers said Cisco expects to cover the payout with 25%-35% of the cash it generates in the U.S. He added that the board's decision on the exact payout will depend in part on developments in U.S. tax policy over the next few months – in particular, on whether Washington changes the repatriation rules.

In a lunch-time conversation with reporters at Tuesday's meeting, Chambers asserted that Cisco is piling up so much cash overseas that it is rapidly coming to a point where it will need to, well, do something with the dough. If the rules let it economically bring the money into the country with a relatively modest tax penalty – he'd like a low-single-digit percentage rate – Chambers said he'd repatriate the whole $30 billion, which could then be used to pay a bigger dividend, buy back more stock, make U.S. acquisitions and hire more staff in the U.S. (And note that the Cisco's cash generation continues to crank; there will be more where that pile came from.)

In his comments, Chambers made a thinly veiled threat: If Washington doesn't change the rules, Cisco will have to invest the cash elsewhere. In short, instead of hiring engineers in Santa Clara County and buying U.S.-based rivals, he'd more likely hire staff in Norway and Taiwan, and purchase companies based in Europe and Asia.

I usually leave the politicking in Barron's to my Washington colleague Tom Donlan, but I must say that Chambers makes a convincing case. For one thing, he vows that Cisco would boost hiring here by 10% if he could efficiently bring the cash home. While critics might see eased rules on repatriation as a tax dodge, corporations would be dodging a tax that wouldn't otherwise be paid. Under the current regulations, it simply makes no financial sense to build U.S. businesses, acquire American companies and hire U.S. employees with overseas cash. Chambers is right: changing the current rules is a total no-brainer.

Hot Quarter

Oracle sales grew nearly 50% in its August quarter, lifting the software giant's profits sharply. The Nasdaq Composite rose 3.3% on the week, finishing at 2,316.


You can reach Eric Savitz at eric.savitz@barrons.com, blogs.barrons.com/techtraderdaily or www.twitter.com/savitz

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