EBay Inc. is taking advantage of record low interest rates toraise domestic funds it may use to reward shareholders whileavoiding U.S. repatriation tax on the 87 percent of its cash heldoverseas.

The Internet marketplace, whose borrowing costs are about halfthat of other technology and electronic firms, paid a rate that'sless than 90 percent of all investment-grade issues this year witha four-part offering on July 19, according to data compiled byBloomberg. The San Jose, California-based company had $8 billion ofcash on June 30, about $7 billion of which was outside the U.S.

While EBay has more than doubled in value since July 2009 byfunneling money into its payments business, Chief Financial OfficerBob Swan said in a February 2011 investor presentation thatoverseas earnings inhibited its ability to distribute cash toshareholders. Proceeds from the new bonds may allow EBay to pay offoutstanding debt and repurchase stock while avoiding a repatriationtax, according to Madison Investment Holdings Inc.

“It's a no-brainer,” Jason Paraschac, an analyst at FitchRatings in New York, said in a telephone interview. “Look at thepresent value of the debt issuance versus repatriating cash andpaying that tax bill. The math is pretty quick.”

Average yields on EBay debt dropped to 1.14 percent last weekfrom 1.81 percent at year-end as borrowing costs for U.S.investment-grade issuers fell to a record 3.06 percent on July 20,according to Bank of America Merrill Lynch index data. Thatcompares with a 1.56 percent yield on higher-rated Microsoft Corp.and a 2.24 percent average among peers in Bank of America'stechnology and electronics index.

Of the more than 200 issues of five-year dollar debt sold bycompanies rated above Baa3 by Moody's Investors Service, theauction runner for everything from artillery shells to Zengardening kits paid the fifth-lowest coupon with its $1 billion of1.35 percent securities due in 2017, Bloomberg data show. 3M Co.,the maker of Scotch tape and Post-It notes, paid the lowest with$650 million of 1 percent debt on June 21.

Amanda Miller, a spokeswoman at EBay, declined to comment on howthe company plans to use proceeds from its bond sale.

The July 19 offering also included $250 million of 0.7 percent,three-year notes, $1 billion of 2.6 percent, 10-year obligationsand $750 million of 4 percent, 30-year debentures. Those couponsare lower than at least nine out of every 10 similar-maturity bondsales in 2012, Bloomberg data show.

'Best Times'

“They are being opportunistic to catch the window and increasetheir onshore cash,” which may be used for share repurchases, ColinGillis, an analyst at electronic brokerage BGC Partners LP in NewYork, said in a telephone interview. “This is probably one of thebest times to be issuing debt if you're a high-quality,high-cash-flow company.”

EBay ranks higher in free cash generation than all Internetsoftware and services firms with more than $500 million of debtexcept Google Inc., Bloomberg data show. Its $1.92 billion of fundsearned in the last four quarters that it can use to rewardshareholders through dividends or stock buybacks, to reinvest inthe company or to pay down debt is more than double that ofFacebook Inc., which has a larger market value than EBay.

Chief Executive Officer John Donahoe has been ramping upinvestments in technology meant to help EBay's fastest-growing unitPayPal, which now accounts for 43 percent of revenue, compared with28 percent when he took the helm in 2008.

The CEO is betting PayPal, traditionally an online-only paymentsservicer, can more directly compete with Visa Inc. and MastercardInc. by allowing in-store purchases at partners such as Home DepotInc. About 95 percent of retail purchases are done offline, theU.S. Department of Commerce said in a May 17 report.

“They could use the cash to further investments on the paymentsside, particularly offline,” Kerry Rice, a San Francisco-basedanalyst at Needham & Co., said in a telephone interview. “Thoseare areas they want to build out and grow as fast as they canbecause there's tremendous opportunity and competition is prettystiff.”

More than half of EBay's $11.7 billion of sales in 2011 camefrom outside the U.S., Bloomberg data show. That saddles thecompany with foreign assets that may be subject to U.S. taxes ifthey're moved inside the country and hinders EBay's ability toreturn money to shareholders.

'Wonderful Benefit'

“A huge chunk of our cash and our cash flows are offshore,”EBay's Swan said at Morgan Stanley's Technology, Media &Telecom Conference in February 2011. “That inhibits our flexibilitya bit right now to think about alternative redistributionstrategies like a dividend.”

The company continues to work on ways to “get the wonderfulbenefit of an extremely low tax rate, but also get our cashgeographically where we would like it to be to enable us to acquireand redistribute cash effectively,” he said.

Under current law, American companies can defer federal incometaxes on most overseas earnings indefinitely. When they do returnto the U.S., they're taxed at the corporate rate of 35 percent —with credits for foreign income taxes paid. Companies paying littleoverseas face higher U.S. tax bills upon repatriation and may savemoney by borrowing instead.

Microsoft, which Janney Montgomery Scott LLC estimates holdsmost of its cash overseas, sold $4.75 billion of bonds in September2010 to help pay for dividends and share repurchases asinvestment-grade borrowing costs dropped to a then-record 3.718percent.

EBay will probably use proceeds from its debt sale to pay downits commercial paper balance with the majority used to fund sharebuybacks, said Madison Investment's Alan Shepard.

“Issuing the debt is directly avoiding the repatriation tax in alegal way,” Shepard, whose firm oversees about $16 billion and ownsEBay bonds, said in an e-mail. The difference between the company'sborrowing cost and the U.S. tax rate “makes it an easy decision fora corporate treasurer to make,” he said.

EBay repurchased about $355 million of its stock in the secondquarter and last week authorized an additional $2 billion ofbuybacks.

Proceeds from the offering also leave EBay prepared with fundsfor a U.S. acquisition, according to Janney Montgomery Scott's JodyLurie. EBay agreed to buy GSI Commerce Inc., which manages websiteinventory for retailers such as Levi Strauss & Co. and Toys RUs Inc., for about $2.4 billion five months after raising $1.5billion in its debut offering in October 2010, Bloomberg data show.EBay said July 18 that it doesn't anticipate any “meaningful” dealactivity in the near term.

“This could be indicative of shareholder-friendly measures, oran expansionary plan in the pipeline,” Lurie, a corporate creditanalyst in Philadelphia, said in a telephone interview. “Clearlytapping the markets now is a lot more attractive than cutting out35 percent of the majority of your cash.”

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