Apple’s burden: a mountain of money it can’t really use

US companies can end up sitting on vast piles of untappable cash, held overseas for tax purposes. Success for the iPhone 6 would make things worse

If, as expected, the launch of the new iPhone and Apple’s iWatch health monitor leads to record sales, more money than ever will pour in to Apple’s enormous pile of cash.

At the last count, at the end of June, Apple had $164.5bn of “cash, cash equivalents and marketable securities” on its balance sheet – up a heady $18bn on just nine months earlier. The vast majority of that money – $137.7bn – is held by Apple’s foreign subsidiaries. From September 2013, its overseas cash mountain increased by $26bn.

In April, US Trust, a private bank, calculated that Apple’s hoard, then $159bn (£97bn), was more than twice the UK’s cash reserves, which stand at $70bn, or roughly equivalent to Britain’s annual spending on education and housing combined.

Only $8.3bn of Apple’s stash is actually in hard cash. The rest is invested in government and corporate securities and other investments. Its biggest holdings are $35.5bn in US treasury bonds and $73bn in corporate securities. Apple also holds sizable investments in foreign countries’ debt, commercial paper-based and mortgage-backed securities, all controlled by its own fund management group, Braeburn.

This giant portfolio is bigger than the world’s largest hedge fund, Bridgewater, which manages about $150bn. But Braeburn Capital – named after the apple – is not run from Wall Street. It is based in Reno, the capital of Nevada, a state where there is no corporation tax or capital gains tax.

What Apple should do with its giant cash pile has become a great talking point of corporate America. Carl Icahn, the activist investor, bought shares in Apple last year and demanded that the company spend $50bn buying back its shares by the end of this month. Icahn, who accused Apple of being “the most overcapitalised company in corporate history”, backed down in February but claimed a partial victory because Apple started buying back its own shares.

Another option is for Apple, which usually shuns big deals, to use the money for acquisitions. Apple surprised analysts this year by paying $3bn for Beats Electronics, the headphone maker and streaming service co-founded by rapper Dr Dre. Apple paid for the deal with just a single month of free cash flow.

Apple’s big problem is that so much of its liquid assets are held overseas, with profits booked in low-tax countries such as Ireland. If it moved the money to the US, the Internal Revenue Service would demand about a third of it. Back in April 2013 Apple got around this inconvenience by borrowing $17bn in the biggest corporate bond offering on record as part of its promised $55bn payout to shareholders by the end of next year. The pledge helped to win over Icahn.

With all that cash in reserve, Apple was able to raise the money at super-low interest rates – it paid far less than it would have had to pay in tax if it had chosen to repatriate cash to fund the buyback. Professor Edward Kleinbard of the University of Southern California argues that Apple’s net cost was next to nothing, because it also earns interest on its overseas holdings.

But paying out cash to shareholders does nothing about almost $140bn sitting untouched overseas. Amit Daryanani of RBC Capital Markets in San Francisco says: “One of the things they can do is acquisitions outside the US. The Beats deal was the most expensive deal they have done in a while, so they may have a bit more appetite to do larger acquisitions.

“But doing something dramatic to make a dent in their cash pile would be [a break] with their history. The most likely thing is they keep chugging along, returning the cash they generate in the US to shareholders and doing small acquisitions as they go along.”

Apple is one of a number of US companies that hold record amounts of cash on balance sheets, with increasing quantities held overseas. The biggest US companies hold $1.95tn outside the US, an increase of $206bn on a year ago, according to Bloomberg.

Companies have lobbied the US for a tax holiday to let them bring the cash back, and even their critics concede that the US tax system does not work. The debate has been heightened by the recent string of tax “inversion” deals by US companies buying overseas to get access to a lower tax rate.

Apple’s boss Tim Cook told Congress last year that the company did not use “tax gimmicks” and would support reforms that increased the company’s tax liabilities.

Kleinbard says the US tax code needs overhauling, but argues that Apple’s untappable overseas cash is not a problem but a direct result of its own planning. “Apple and firms like it are hoist by their own petard. They have gigantic pools of cash that are the fruit of their tax-avoidance labour but they can’t enjoy it in the way they want because that is the deal. The way to look at the cash is not that it’s a problem but that it’s the result of the success US firms have had in generating stateless income.”