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Apple Preps Bond Sale for Stock Buyback Initiative

Well that is interesting.... and very canny.

With borrowing rates so low overall, and with Apple's strong cash position, they will be paying virtually no interest on the bonds. It's almost free money.

At the same time, they are taking whole bunch of shares off the market, which makes the remaining shares more valuable. If the value of the shares increase by more than the interest rate Apple is paying on the bonds then they are making money.

For example. They borrow $400 at 2% interest. They buy $400 worth of stock back (say one share). In a year they sell that share back into the market - but lets say that the share price has increased in that year by 10%. Apple sells that share back into the market at $440, and pays the bond holder $8. Apple increases its value by $32 - which I believe is tax free since it's not earned income (even though the $8 interest payment is a tax write-off as a business expense).

This of course all is predicated on Apple stock increasing in value. If you are about to release something pretty cool, it's a good bet. Just the fact you are buying back stock on this scale increases the confidence in a stock and leads to better values.

Very very canny.
 
Peace said:
So instead of bringing cash into the U.S. and paying tax on that cash Apple decides to take on debt instead.

Am I wrong in thinking the debt effects the bottom line ?
Apple would rather take on debt than bring some of it's cash back into the U.S.
Click to expand...

The total interest of the bonds will be lower than the total amount they would pay in taxes to bring the required cash into the US. So borrowing using the out-of-country cash as collateral is a quick and easy way to lower their out-of-pocket cost for the overall transaction.

Think of it this way. You want to get $100 out of the bank over the weekend. The ATM fee is $5. Getting the cash out from a teller (live person) is free, but you cant get there until Monday. Your friend will loan you the $100 for a fee of $1. So, would you rather pay $5 to get the cash now, or borrow the money and pay only $1?
 
snberk103 said:
Well that is interesting.... and very canny.

With borrowing rates so low overall, and with Apple's strong cash position, they will be paying virtually no interest on the bonds. It's almost free money.

At the same time, they are taking whole bunch of shares off the market, which makes the remaining shares more valuable. If the value of the shares increase by more than the interest rate Apple is paying on the bonds then they are making money.

For example. They borrow $400 at 2% interest. They buy $400 worth of stock back (say one share). In a year they sell that share back into the market - but lets say that the share price has increased in that year by 10%. Apple sells that share back into the market at $440, and pays the bond holder $8. Apple increases its value by $32 - which I believe is tax free since it's not earned income (even though the $8 interest payment is a tax write-off as a business expense).

This of course all is predicated on Apple stock increasing in value. If you are about to release something pretty cool, it's a good bet. Just the fact you are buying back stock on this scale increases the confidence in a stock and leads to better values.

Very very canny.
Click to expand...

Doesn't work that way. When a company buys the shares back, they get retired, or set aside for grants. The company cannot sell them back in the open market. They would have to create a secondary IPO.
 
BRLawyer said:
The moment you start taking on debt is the moment you lose your independence.

What makes this move even more moronic is the basic fact that Apple, of all companies, is the ONLY one with zero debt and zero need to borrow money.

Of course, the usual "investors" looking for a cheap buck will praise this move as the main enabler of fat dividends and artificially-higher stock prices.

Remember when SJ used to tell us how Apple had no debts whatsoever? Where is he when we need him?

Tim Cook = Michael Spindler Redux.
Click to expand...

There is more to the borrowing than you might think. Try reading this:

http://9to5mac.com/2013/04/26/apple...-by-more-than-the-cost-of-the-borrowing-aapl/
 
RHutch said:
There is more to the borrowing than you might think. Try reading this:

http://9to5mac.com/2013/04/26/apple...-by-more-than-the-cost-of-the-borrowing-aapl/
Click to expand...

So to update my example:

You want to get $1000 out of the bank over the weekend. The ATM fee for getting that much cash is $10. Getting the cash out from a teller (live person) is free, but you cant get there until Monday. Your friend will loan you the $1000 for a fee of $5.

By accepting the loan, you pay $5 less in fees, and can write off the $5 you paid to your friend when you file your taxes at the end of the year (interest expense). So in the long run, it ends up costing you $0 or less after taxes.
 
Squeak825 said:
Doesn't work that way. When a company buys the shares back, they get retired, or set aside for grants. The company cannot sell them back in the open market. They would have to create a secondary IPO.
Click to expand...

OK - thanks. Have they sold all the shares initially authorized? Would selling unsold shares not have the same effect?

I know it's not the same situation, but my business is incorporated as a non-public corporation. I think we assigned something like 100 shares (out of a thousand or something) to my wife and myself.
 
BRLawyer said:
The moment you start taking on debt is the moment you lose your independence.

What makes this move even more moronic is the basic fact that Apple, of all companies, is the ONLY one with zero debt and zero need to borrow money.

Of course, the usual "investors" looking for a cheap buck will praise this move as the main enabler of fat dividends and artificially-higher stock prices.

Remember when SJ used to tell us how Apple had no debts whatsoever? Where is he when we need him?

Tim Cook = Michael Spindler Redux.
Click to expand...

Not really. The debt instruments for companies with Apple's kind of credit rating have very few points of control in them. Apple won't give these debt holders any promise much beyond "I will pay you interest every quarter and your principal back on X date." Debtholders will not have any say in Apple's business.

Now if you want to issue cheap debt and your rating is B, then that is a different story.
 
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Sorry, but the amount of stupidity here is baffling.

1) Smart people borrow money all the time when it suits them financially Borrowing money at 2% and holding investments at 3% is better than cashing in bonds at 3% and having no debt (or borrowing at 2% and having to pay 15% in taxes). Peter Oppenheimer, CFO > Internet Armchair Accountants on MR

2) Apple is buying back stock slowly. They can't afford to completely go private, but you can bet that's where they are headed. As long as they are a public company, they are still dependent on some outside entity (stockholders). And given the current state of affairs, a bank loan is much less volatile than Apple's share price.

3) Tim Cook is the business genius to Steve's marketing/product genius. Tim Cook is the reason why Apple has $145bn in the bank. Cook is the reason why the Steve could announce the iPad at $499 instead of $999. Cook definitely isn't a product guy, no doubt. But he is a master at operations. (This is the reason why Steve Jobs recommended Cook as his successor).

Firing Tim Cook would be a huge disaster for Apple (see #3). It's what a vocal minority of the stockholders are calling for (see #2), which is why it won't happen.
 
Squeak825 said:
Doesn't work that way. When a company buys the shares back, they get retired, or set aside for grants. The company cannot sell them back in the open market. They would have to create a secondary IPO.
Click to expand...

But it basically does work that way since Apple is buying them to set them aside for grants. Those grants will be exercised, the shares sold on the market for cash or ownership transferred to those holding the grants and they are effectively back on the market again. Apple is buying at a low price so that the grants won't cost them as much in a later time, it is a great plan and the interest on the bonds is tax deductible vs paying taxes on bringing the money home that they made for selling product made in Brazil and sold in Argentina back to the US and be taxed at 35%.
 
jdechko said:
Sorry, but the amount of stupidity here is baffling.


2) Apple is buying back stock slowly. They can't afford to completely go private, but you can bet that's where they are headed.
Click to expand...

Accusing other of stupidity and then, two paragraphs later, claiming that the second most expensive publicly traded company is actually planning to go private, is bizarre.

You'd need *much* more money than the current market cap to buy out a company. Especially a pretty successful one.
Private buyouts usually only happen when a company is struggling and needs to undergo massive long-term restructuring without interference from the stock market.

Buying back stock is a very common and simple measure to drive up the stock. Nothing more. A lot of companies with low growth do it.
 
BRLawyer said:
The moment you start taking on debt is the moment you lose your independence.

What makes this move even more moronic is the basic fact that Apple, of all companies, is the ONLY one with zero debt and zero need to borrow money.

Of course, the usual "investors" looking for a cheap buck will praise this move as the main enabler of fat dividends and artificially-higher stock prices.

Remember when SJ used to tell us how Apple had no debts whatsoever? Where is he when we need him?

Tim Cook = Michael Spindler Redux.
Click to expand...

You must have Henny Penny on speed dial.

Interest rates are at historic lows, which allows Apple to advance against future cash flows at virtually no cost at all.
 
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Peace said:
So instead of bringing cash into the U.S. and paying tax on that cash Apple decides to take on debt instead.

Am I wrong in thinking the debt effects the bottom line ?
Apple would rather take on debt than bring some of it's cash back into the U.S.
Click to expand...

It does, and so do taxes. Paying 2% to sell these bonds takes a lot smaller chunk out of the bottom line than paying the US tax after already paying the SAME tax to the country where the economic activity actually occurred.
 
Speedy2 said:
Accusing other of stupidity and then, two paragraphs later, claiming that the second most expensive publicly traded company is actually planning to go private, is bizarre.
Click to expand...

Yes, it's an outlandish theory. Just tired of hearing that Cook needs to go and that Apple's performance as a company is judged solely on their stock price. That and I'm having a stressful week. I shouldn't take it so personally, and I'm sorry.

Speedy2 said:
You'd need *much* more money than the current market cap to buy out a company. Especially a pretty successful one.
Private buyouts usually only happen when a company is struggling and needs to undergo massive long-term restructuring without interference from the stock market.

Buying back stock is a very common and simple measure to drive up the stock. Nothing more. A lot of companies with low growth do it.
Click to expand...

Agreed. Stock buybacks are usually done to drive up share prices, but I still think it could end up being a political maneuver.
 
Interesting factoid from the back story: The financial markets expect Apple to be able to sell bonds at 45-50 basis points over 10-year federal note rates, which means they will come in at around 2.4%. Meanwhile, the common stock pays a dividend of around 3%.
 
Hello, Loss of Focus!

For me, this announcement, more than any piece of Apple-related news even before Steve Jobs' death, represents an alarm call that this company has lost sight of the fundamentals. Apple's key focus used to be on delighting customers and awing competitors. This move to appeal to the parasitic investment market is sad confirmation that delight and awe is possibly slipping out of Apple's control.
 
Mod Note: This thread is closed temporarily to clean up all the off-topic, PRSI posts. When it reopens, please remain civil and on-topic.

EDIT. Thread now open.
 
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I take it they can't just use an overseas subsidiary to buy the shares rather than borrowing the money? I'm in the UK and I can buy shares on the Nasdaq. Must be some sort of tax avoidance rule that makes them do it this way.

Does anyone know what they are going to do with the shares once they've bought them? Do they go out of circulation or can they sell them again at a later date if the share price appreciates considerably?
 
GFLPraxis said:
Ooh, I like this idea.

As crazy as it sounds, could Apple go private? If they sell corporate bonds at a set interest rate, and take all that money to buy their stock back, as well as the money in the bank...

Their market cap is 399 billion. They're halfway there if they sell 100 billion in corporate bonds.
Click to expand...

It is a big buy. Barring another major slump, their purchases will bring the price up so they won't end up buying back 25% of the cap. Going private will cost a lot more than $399 billion.

However, the re-purchase can help concentrate voting power. If you don't sell any shares during the buy back, your stake in the company increases.

----------
Shaun said:
I take it they can't just use an overseas subsidiary to buy the shares rather than borrowing the money? I'm in the UK and I can buy shares on the Nasdaq. Must be some sort of tax avoidance rule that makes them do it this way.

Does anyone know what they are going to do with the shares once they've bought them? Do they go out of circulation or can they sell them again at a later date if the share price appreciates considerably?
Click to expand...

They are buying shares and removing them from the market. It is a different process. I imagine it can only be done in the US for US company.

----------
Peace said:
So instead of bringing cash into the U.S. and paying tax on that cash Apple decides to take on debt instead.

Am I wrong in thinking the debt effects the bottom line ?
Apple would rather take on debt than bring some of it's cash back into the U.S.
Click to expand...

Interest payments will, but not in a material way. It is a savings versus the alternative.

Think how happy this will make all the people that miss-understand enterprise value.
 
snberk103 said:
Well that is interesting.... and very canny.

With borrowing rates so low overall, and with Apple's strong cash position, they will be paying virtually no interest on the bonds. It's almost free money.

At the same time, they are taking whole bunch of shares off the market, which makes the remaining shares more valuable. If the value of the shares increase by more than the interest rate Apple is paying on the bonds then they are making money.

For example. They borrow $400 at 2% interest. They buy $400 worth of stock back (say one share). In a year they sell that share back into the market - but lets say that the share price has increased in that year by 10%. Apple sells that share back into the market at $440, and pays the bond holder $8. Apple increases its value by $32 - which I believe is tax free since it's not earned income (even though the $8 interest payment is a tax write-off as a business expense).

This of course all is predicated on Apple stock increasing in value. If you are about to release something pretty cool, it's a good bet. Just the fact you are buying back stock on this scale increases the confidence in a stock and leads to better values.

Very very canny.
Click to expand...

You do not buy back stock and then sell it into the market. The idea of buying back stock is to reduce the number of shares circulating and hopefully increase the value of each share to the shareholders benefit.
It is a way of returning value to the shareholder.
 
achbed said:
....
By accepting the loan, you pay $5 less in fees, and can write off the $5 you paid to your friend when you file your taxes at the end of the year (interest expense). So in the long run, it ends up costing you $0 or less after taxes.
Click to expand...


The first part is good thinking, imho. But that's not how tax write-offs work.

There are no tax implications on the principal when you borrow money and then pay it back - it is not 'income'. But, lets say you put that $1000 to work and earned $100 - that $100 is the income that is taxed. For argument's sake lets say at 25%.... so you would owe $25 in tax if there were no write-offs. In this very simple example you have one write-off.... the $5 in interest you paid your friend. This $5 is deducted from the income - not the tax owed - so you are paying 25% tax on $95 (instead of the $100) which means you owe $23.75 in taxes. So, your $5 'interest expense' saves you $1.25.

In this hypothetical example you used the $1000 you borrowed to earn $100. You give the $1000 back, pay a little less than $30 in taxes and expenses, and keep the $71.25 as profit. If you had earned that $100 income with no interest expense then your net profit would have been $75. The 'interest expense' means you have less profit, even with the tax write-off.

Also... based on some comments above. Apple may be able to borrow the money at a rate lower than the dividend they are paying. So the expense of borrowing the money is less than what it would have cost them if they had left the shares on the market. That is... without actually putting the borrowed funds to work, they are saving money by borrowing it. Smart Cookies there in Cupertino, eh?

Plus, the value of the stocks held increases since the sum value of the company is now shared by fewer people... each person's piece of the pie just got bigger.
 
Calm down.

I think the CFO at Apple knows a little more than most of the ignorant commenters posting on this forum. Apple can borrow at super cheap rates to buy thier own stock, which is basically half off right now. By repurchasing their own stock, and by launching the new products in their pipeline, the stock booms, they can resell the shares they purchased at a huge profit, and pay a little interest on the bonds. Sounds like a good plan to me.
 
nebo1ss said:
You do not buy back stock and then sell it into the market. The idea of buying back stock is to reduce the number of shares circulating and hopefully increase the value of each share to the shareholders benefit.
It is a way of returning value to the shareholder.
Click to expand...

A little more to the point, reducing the float increases EPS.

Public companies can create new shares pretty much at will, and they generally do so routinely in the form of stock and option grants to top execs. This leads to dilution of the current stockholders' share of the company. Apple has bought back shares before in order to cancel out some of that dilution, but never in such a dramatic way.
 
GFLPraxis said:
Ooh, I like this idea.

As crazy as it sounds, could Apple go private? If they sell corporate bonds at a set interest rate, and take all that money to buy their stock back, as well as the money in the bank...

Their market cap is 399 billion. They're halfway there if they sell 100 billion in corporate bonds.
Click to expand...
Sometimes Creditors are worse than shareholders. They can call for repayment of loans at the worse times and sell off your assets and force you into bankruptcy for repayment of loans.

----------
Dsall467 said:
I think the CFO at Apple knows a little more than most of the ignorant commenters posting on this forum. Apple can borrow at super cheap rates to buy thier own stock, which is basically half off right now. By repurchasing their own stock, and by launching the new products in their pipeline, the stock booms, they can resell the shares they purchased at a huge profit, and pay a little interest on the bonds. Sounds like a good plan to me.
Click to expand...
This also sounds like some kind of stock manipulation. Funny huh?:confused::)
 
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