Apple could save over $1B on alleged Beats deal with international acquisition - report

Posted:
in General Discussion edited May 2014
Because Beats Electronics has tax residency in Ireland, Apple could structure a deal with the headphone maker in such a way that it would not only be able to use its massive international cash pile to pay for the deal, but it could also significantly reduce the final price with international tax laws, one financial expert says.


Photo via Paul Stamatiou.


Joseph Harpaz, the tax and accounting expert on the leadership team at Thomson Reuters, penned a guest column for Forbes this week in which he said the existence of Beats Electronics Holding Limited, a corporation established in Ireland in 2012, could become a key part of a potential deal with Apple. Specifically, Apple could pay for the purchase entirely with foreign funds -- money that has not been repatriated back to the U.S. at a high tax rate.

"M&A decisions are increasingly being driven by offshore tax policy," Harpaz wrote. "It's hard to argue the business logic of using offshore income to acquire foreign companies versus bringing the money back into the U.S. for a domestic acquisition."

Using what he admitted is "the rough math of a foreign acquisition," Harpaz said that Apple's rumored $3.2 billion bid for Beats could actually come in around $2 billion if the transaction were to be completed in Ireland. His calculations, however, seem to presume that Apple would opt to repatriate that cash for a U.S. deal.

With his estimated final price pegged at more than $1 billion cheaper than the rumored offer, and with Apple carrying some $138 billion in cash and short-term marketable securities overseas, Harpaz believes Beats' presence in Ireland could be a major incentive for Apple.

But Harpaz's calculations assume that Apple would repatriate the necessary cash and pay taxes on it for a U.S.-based deal, something that executives at the company have signaled they have no plans to do. As of last quarter, Apple had some $18 billion in cash held domestically, and the company also has the ability to raise debt at low rates, suggesting that it wouldn't need to repatriate any funds for a domestic acquisition.

Still, in Harpaz's view, there are legitimate reasons Apple might pursue an international acquisition strategy --?one that could ultimately save the company a considerable amount money, he argued.


Beats headphones and an Apple iPhone. Photo by M.J. Rodriguez


Word first surfaced earlier this month that Apple and Beats are allegedly in late-stage discussions for a potential acquisition said to be worth some $3.2 billion. The latest rumors have indicated that the deal is not yet finalized, but seems likely to go through.

While Beats is best known for its premium headphones, reports have claimed that the deal could be more of an "acqui-hire" to bring Beats co-founder and Chief Executive Jimmy Iovine onto its team --?someone who could help in negotiating contracts with content providers, thanks to his longstanding industry ties. It's also been said that Apple is interested in Beats Music, a Spotify-like subscription music service that could complement its existing iTunes Radio streaming, which is more akin to Pandora.

While word of a potential deal between Apple and Beats has earned considerable buzz, AppleInsider reported this week that reporting rules with the U.S. Securities and Exchange Commission could actually allow Apple to keep quiet on the deal, if it so chose. Though the $3.2 billion price would make it by far the largest acquisition in Apple's history, Apple's sheer size means that the reported deal might not be considered materially significant.
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Comments

  • Reply 1 of 27
    gatorguygatorguy Posts: 23,516member
    Just read an article at SeekingAlpha explaining how Google and other companies like Apple and Microsoft will be turning their attention to international deals where their overseas holdings can be used while avoiding some "inconvenient" tax obligations.
    http://seekingalpha.com/article/2234863-what-will-googles-30-billion-in-foreign-acquisitions-do?uprof=45
  • Reply 2 of 27
    asciiascii Posts: 5,936member
    I know how they could save $3.2bn :)
  • Reply 3 of 27
    andysolandysol Posts: 2,506member
    Did I not say all along $3.2b is simply too much when you look at ROI? Did I also say that $2b is the target number and the only way that this deal makes sense?

    Thank you... Thank you. :D

    I like this deal now- the price is right.
  • Reply 4 of 27
    leavingthebiggleavingthebigg Posts: 1,291member

    The funniest rumor I read today was written by Cult of Mac, where it is rumored Apple purchased Beats to keep it out of Samsung's hands. Samsung supposedly attempted to purchase Beats earlier this year, but the attempt did not pan out. This is the first time I read about another company having been interested in Beats. Too funny.

  • Reply 5 of 27
    philboogiephilboogie Posts: 7,675member
    gatorguy wrote: »
    Just read an article at SeekingAlpha explaining how Google and other companies like Apple and Microsoft will be turning their attention to international deals where their overseas holdings can be used while avoiding some "inconvenient" tax obligations.
    http://seekingalpha.com/article/2234863-what-will-googles-30-billion-in-foreign-acquisitions-do?uprof=45

    Why put the word inconvenient in quotes? If there is money to be saved, all companies should do so if possible. Google is fully in their right to use The Double Irish & Dutch Sandwich.

    http://tellmeyourview.wordpress.com/2013/02/03/the-double-irish-the-dutch-sandwich/
  • Reply 6 of 27
    rogifanrogifan Posts: 10,669member
    The funniest rumor I read today was written by Cult of Mac, where it is rumored Apple purchased Beats to keep it out of Samsung's hands. Samsung supposedly attempted to purchase Beats earlier this year, but the attempt did not pan out. This is the first time I read about another company having been interested in Beats. Too funny.
    If this is true the fact that Samsung was interested should be a red flag for Apple. :lol:
  • Reply 7 of 27
    irelandireland Posts: 17,794member
    So in return Apple builds 5 Apple stores in Ireland???????????????

    :-(
  • Reply 8 of 27
    mastericmasteric Posts: 89member

    So, while everyone was hammering (including congress) was hammering Apple for tax residency in Ireland, here comes Beats (and yes, I know, many others) who also does the exact same thing. I didn't see Dr. Dre in front of congress like Apple's Tim Cook having to explain why they do it.

     

    As for the price; $3.2 billion seems like a deal compared to what Facebook paid for WhatsApp ($19 billion). At least Beats has a physical product. 

  • Reply 9 of 27
    MarvinMarvin Posts: 14,880moderator
    The funniest rumor I read today was written by Cult of Mac, where it is rumored Apple purchased Beats to keep it out of Samsung's hands. Samsung supposedly attempted to purchase Beats earlier this year, but the attempt did not pan out. This is the first time I read about another company having been interested in Beats. Too funny.

    HTC was quite heavily linked with Beats, they even had Beats branding on their phones and Samsung would do anything to take HTC down as they would any of their rivals:

    1000

    http://www.cnet.com/news/samsung-probed-for-allegedly-bashing-rival-htc-online/

    HTC's phones are clearly better quality than Samsung's.
  • Reply 10 of 27
    andysolandysol Posts: 2,506member
    Quote:
    Originally Posted by Masteric View Post

     

    At least Beats has a physical product. 


     

    Which makes it easy to calculate valuation and a fair purchase price.  Its where there are synergies, like software, where it's harder to determine exact valuation.

    Beats headphones and Apple don't have synergies (if you think they do- it's the equivalent of arguing that Apple should buy iHome)- Beats would be best run as an independent company (i.e.- Beats by Apple).  I was a detractor because 3.2b was too much, but 2b is the correct valuation based on their profit they've mentioned- it's a good deal for Apple because the streaming is just icing on the cake.

  • Reply 11 of 27
    rogifan wrote: »
    If this is true the fact that Samsung was interested should be a red flag for Apple. :lol:

    Agreed. The Southeast Asian rumor mill is working overtime trying to make it seem as if Samsung can compete with Apple. With so much crap coming from Samsung as fast as possible, the rumor mill has to go back in time to say Samsung was somewhere before Apple got there. The funny part of that thinking is Samsung got there first and failed. Apple stepped in and succeeded.
  • Reply 12 of 27
    adrayvenadrayven Posts: 460member
    Well.. considering US has the highest repatriation fee in the WORLD at 30%... where EVERYONE else is 15% or lower.. Canada is 8%.. I cannot blame them.. Samsung pays nearly nothing to pull their money back into S. Korea...

    Until congress pulls it's preverbal and literal head out of it's @$$ and gets with it, I would fully expect this to continue.. This is a GLOBAL economy.. We COMPETE with the rest of the world.. keeping DOUBLE the rate of everyone else is ST TT TTT UUUU PPPP III DDD and a big reason companies shy from making US a corporate home base..! Much less making it costly to bring funds into the US to build and create jobs...
  • Reply 13 of 27
    mj webmj web Posts: 918member

    "Because Beats Electronics has tax residency in Ireland, Apple could structure a deal with the headphone maker in such a way that..."

    Could? Will!

  • Reply 14 of 27
    anantksundaramanantksundaram Posts: 20,368member

    Yes, this is certainly plausible, but Apple has to keep any profits earned from the 'Beats subsidiary' abroad.

     

    Anything profits repatriated to HQ will get taxed at the US rate.

  • Reply 15 of 27
    applesauce007applesauce007 Posts: 1,687member
    Quote:

    Originally Posted by ascii View Post



    I know how they could save $3.2bn image

     

    Penny wise pound foolish.

  • Reply 16 of 27
    If part of the savings for Apple is the reduction in how much taxes they are not paying to repatriate money to the US, then I don't think this valuation holds water. If they are using the top marginal tax rate of 35%, then about $1.26 Billion is the savings from $3.6 billion. This is not the same deal as the linked article about foreign purchases that notes the valuations for tech are much lower outside of Silicon Valley. This is a high value purchase price. It does not make sense unless Apple has a view of this deal that includes a new line of products. A wireless beats branded headset that includes siri type search responses as a type of wearable product is the only thing I can come up with. I am not saying this is what Apple is doing. I am saying this is why Apple keeps their future tech moves secret.
  • Reply 17 of 27
    andysolandysol Posts: 2,506member
    Yes, this is certainly plausible, but Apple has to keep any profits earned from the 'Beats subsidiary' abroad.

    Anything profits repatriated to HQ will get taxed at the US rate.

    I'm sure it's way way way more complicated than that. You'd need a team of tax experts to determine the tax details of this deal. No single poster here will know.
  • Reply 18 of 27
    anantksundaramanantksundaram Posts: 20,368member
    Quote:
    Originally Posted by Andysol View Post



    I'm sure it's way way way more complicated than that. You'd need a team of tax experts to determine the tax details of this deal. No single poster here will know.

    What I told you is simply the law. It's not that complicated.

     

    You're welcome to check with your 'experts' (and tell us what you found out, just as I did).

  • Reply 19 of 27
    andysolandysol Posts: 2,506member
    What I told you is simply the law. It's not that complicated.

    You're welcome to check with your 'experts' (and tell us what you found out, just as I did).

    What if they dissolve beats?
    How would the absorption of beats music into iTunes affect taxes of revenue from current subscribers?

    Those are 2 of hundreds of questions that would be asked to a team of the best tax analysis money can buy.

    Look, I was being nice in my first post. Let me try a different tactic. You have no idea what you're talking about because it's way over your head, my head, and any acquaintance you know. It's so complicated it needs a team.
    Now if you've worked on the tax laws of an international acquisition worth $3.2billion by a domestic company- and did it all by yourself, I'm all ears. Otherwise, shut it.
  • Reply 20 of 27
    timgriff84timgriff84 Posts: 912member
    Does this actually come as a surprise to anyone? I think virtually ever large take over deal I've read the details of is actually paid with different amounts of money and shares in different countries. If your selling stuff in the billions part of it is going to be working out where all the money would be. They wouldn't agree a price and then say by the way its non usa money.

    There also not really saving anything as they have no reason to ever bring the money to the states.
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