Moody’s: U.S. overseas tech could double cash reserves

New York, June 27, 2011 — Overseas cash balances of major technology firms such as Apple, Microsoft (rated Aaa), Cisco (rated A1) and Google (rated Aa2) could double to $238 billion over the next three years, according to a new report from Moody’s Investors Service.

“Stronger overseas growth prospects along with heavier domestic cash uses for capital expenditures, dividends and share repurchases, as well as acquisitions will drive overseas cash balances higher for many U.S.-based technology firms,” Moody’s Senior Analyst Richard Lane said. “The high tax bite on permanently repatriated funds also encourages money to stay on an extended overseas vacation,” Lane said.

A sampling of large technology companies shows that 70% of total cash and short-term investments is held overseas, up from 57% four years ago. Based on the structural elements of cash sources and uses, Moody’s projects this collective balance could rise to 79% by 2013 years unless some form of permanent tax reform is implemented.

While investment-grade technology firms have by and large demonstrated good financial discipline through recent cycles, the high tax bite effectively “serves as an additional governor” to limit excessive shareholder-friendly activities, such as engaging in large share repurchases of dividend payments, Lane said.

Although share buyback activity or common dividend increases could be more aggressive, to the extent that permanent tax reforms are implemented, “we do not believe large technology firms would go on a shareholder-friendly bender” to the detriment of their credit ratings, Lane said. “Instead we expect a balance of cash deployment, including potentially more active M&A activity to fill in product or technology gaps to strengthen their competitive positions.”