Weekly Update #235: Tax Reform and Tech M&A

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Hello Investors,

Apple was the first large tech company to respond to the “Tax Cuts and Jobs Act of 2017”, announcing last week that it would incur $38B of repatriation tax payments to bring some of its foreign cash hoard home. The new tax bill, which was passed late last year, provides for a one-time reduction in the repatriation tax rate to 15.5% (for cash) from 40% previously. Based on the reduced rate, we estimate roughly $245B of Apple’s cash is set to return stateside.

Key questions now are -- will other tech companies follow suit and could this cash loosen tech M&A spigots? We noted in a prior weekly update that tax considerations were likely a contributing factor to slower M&A activity domestically, as many tech giant were choosing to keep large portions of their cash stores abroad. Aside from Apple, other companies with significant foreign cash holdings include Cisco, Microsoft, Oracle, Qualcomm and Alphabet.

S&P 500 Companies With Large Foreign Cash Stockpiles

Source: Bloomberg

Of course, companies could choose to deploy the newly returned cash elsewhere -- R&D, higher dividends and buybacks are other possible avenues. A Congressional Research Services study suggests that in the last repatriation holiday, ~91% of repatriated capital was used for share buybacks.

Other recent news:

  • Kroger is reportedly in talks to buy Boxed for $500M. The offer compares to the startup’s ~$425M implied valuation from its last funding round.
  • Instacart acquired coupon startup Unata for $65M. On top of its coupon service, Unata has been developing voice-ordering software as well, which could help Instacart compete more effectively against Amazon’s recent push into the grocery space. Instacart now operates in 190 markets across North America (vs. 30 previously).
  • Slack is now available as a Snap on Linux. In our view, the move may bolster the startup’s dominant position in the collaboration market as it opens the app to a wider potential user base.

Thanks,
Phil Haslett
Founder + Head of Investments, EquityZen

 

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