Why eBay is taking a $3 billion tax charge
The company's unusual step ensures it has the money to buy something big. It's paying a steep price, though.
EBay (EBAY) is taking the unusual step of bringing most of its foreign-held cash back to the U.S. -- and with it a $3 billion tax bill.
The online marketplace reported first-quarter profit above forecasts, but the tax charge and a weak outlook for the current quarter sent the company's shares tumbling.
"We are an acquisitive company and we need to ensure we have the resources available to capitalize on targets that become available," said Bob Swan, the San Jose, Calif., company's chief financial officer. "To be clear, we are not announcing any large U.S.-based acquisition."
EBay said it would bring as much as $9 billion that it had previously designated as permanently invested overseas back to the U.S., meaning it will pay tax on the difference between the U.S. and foreign tax rates.
The move appears to be one of the largest repatriations in recent years. Avon Products (AVP) last year recorded a $169 million tax provision so that it could bring foreign-held cash back to the U.S. more easily.
Rather than repatriate foreign earnings and pay the tax, many more companies are borrowing for domestic purposes. Apple (AAPL) on Tuesday said it would sell $12 billion in bonds, just a year after agreeing to a $17 billion bond sale.
As of the end of last year, eBay said it had $12.8 billion in cash and short and long-term investments. Of that total, $9.7 billion was held overseas, according to securities filings.
"Firms as strong as eBay could go the Apple route and just use foreign cash to service their debt," said Edward Kleinbard, a professor at University of Southern California's Law School and a former chief of staff for Congress's Joint Committee on Taxation. "It's surprising that a company would incur current costs when they could just issue debt."
The move was announced after the close of regular trading Tuesday, and investors sent the company's shares down 4.3 percent in aftermarket trade. Wednesday, Ebay shares fell more than 4.5 percent to $52.05.
EBay reported an 11 percent jump in first-quarter adjusted earnings, which excluded the tax charge, as payments unit PayPal continued to draw new users.
The company this month persuaded activist investor Carl Icahn to drop a demand that eBay spin off PayPal, after eBay proposed a new independent board member and granted the investor special access to corporate strategy.
EBay Chief Executive John Donahoe had resisted Mr. Icahn's suggestion, arguing that PayPal was more valuable as part of eBay. He said the payments unit's growth could be stifled if it were spun off.
PayPal posted revenue of $1.85 billion for the quarter, up 19 percent. It gained 5.8 million new registered users, continuing its pace to one day soon overtake the marketplace as eBay's largest unit by revenue.
EBay's traditional marketplace boosted its user rolls by 4.8 million accounts and raised sales by 10 percent to $2.16 billion.
EBay has been reworking its business from a focus on auctions of memorabilia and other hard-to-find goods to a general marketplace with well-known brands and fixed prices. At PayPal, which primarily had been used to exchange money over the Internet, eBay hopes to bring in new business from physical retail and smartphone use.
Overall, eBay reported a first-quarter loss of $2.33 billion, including the anticipated tax charge.
Excluding the tax charge and other items, the company said it would have earned $899 million, or 70 cents a share, up from $829 million, or 63 cents a share a year earlier. In January, eBay forecast earnings of 65 cents to 67 cents a share on that basis.
Revenue rose 14 percent to $4.26 billion. EBay had forecast between $4.15 billion and $4.25 billion.
EBay maintained its revenue and per-share earnings outlook for the year, excluding certain costs.
For the second quarter, eBay projected earnings between 51 cents and 53 cents a share. Excluding items, the company's forecast 67 cents to 69 cents a share on revenue of $4.33 billion to $4.43 billion.
—Anna Prior contributed to this article.
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Viper, very little is hid now days in this age of computers and government agreements. In fact it's not that important nor are the tax savings as important as some might think, although it would create double taxation in some cases. What's more important is having non $ denominated assets when the $ is unpegged as the world reserve currency and it's coming. When it happens US assets, including yours and mine, will be worth at least 25% less as fast as overnight. There will be havoc in the streets.
There is ever increasing pressure for the IMF to create a reserve currency with a weighted basket of currencies with heavily gold and maybe oil backed currencies being the heavy weights and debt laden currencies like the $ being on the bottom of the basket if included at all.
Companies as well as individuals having assets in other currencies is just being smart. About all us peons can do is own a little gold and silver unless your a currency trader.
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Do it once a year. This allows the best-performing asset classes to take off and run.
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