U.S. companies are making overseas acquisitions now and waitingfor tax changes later.

Intel Corp. said Monday it is paying $15 billion to buy Israel'sMobileye NV, and in January, Johnson & Johnson agreed to buySwitzerland's Actelion Ltd. for $30 billion. In both cases, thecorporations are paying for their acquisitions completely with cashthey'd stashed abroad.

Other companies are doing the same, and more such deals areprobably coming, said Marshall Sonenshine, chairman of investmentbank Sonenshine Partners.

These deals have contributed to a surge in overseasacquisitions: Publicly listed U.S. corporations have announced morethan $60 billion in acquisitions of targets outside of NorthAmerica this year, more than double the amount in the same period ayear ago, according to data compiled by Bloomberg.

“There's going to continue to be a very vibrant cross-bordertrade,” Sonenshine said. “There's too much cash on corporatebalance sheets. That cash wants to go someplace. If it can't gohome, it will travel.” Congress's nonpartisan Joint Committee onTaxation has estimated that U.S. corporations hold as much as $2.6trillion of profit overseas that hasn't yet been taxed in theU.S.

Timing Uncertain

If the companies had waited, they may have been able to bringthat cash back into the U.S. at a much lower tax rate, underproposed changes from both Congressional Republicans and PresidentDonald Trump. While details of a tax plan have yet to emerge,it's possible that corporations could've used that money for sharebuybacks, dividends, investments or whatever else they thought madesense. Under current law, companies can defer U.S. taxes onoffshore profit until they return the earnings to the U.S., atwhich point they must pay a 35% rate.

But the timing for major tax legislation is unclear as U.S.Congress focuses on a health care overhaul now. Senate MajorityLeader Mitch McConnell said last week that a tax overhaul may notbe completed before Congress takes its recess in August. Trump andHouse Republicans have proposed differing plans, although thepresident's plans so far have been less detailed.

“No one wants to wait for the tax change,” said Marc-AnthonyHourihan, co-head of Americas mergers and acquisitions at UBS GroupNew York. “If you're going to wait for that or time your dealaround that, you can't.”

Strategic, Expensive

In many cases, acquirers have good strategic reasons to makeoverseas purchases — Intel, for example, is buying a company thatmakes chips for cameras and driver-assistance features, in a bet onthe future of self-driving vehicles. J&J is hoping toprofit from bringing biotech drugs to market, broadening theirpotential uses, and getting more money from insurers.

The valuations in both cases were relatively expensive.Intel paid a 34 percent premium to Mobileye's closing pricebefore the deal was announced — a high price for a company withrevenue of just $358 million last year, said Dave Novosel, ananalyst at bond research firm Gimme Credit.

Spending the money now could also result in future tax savings.Under the proposed overhaul from Congressional Republicans lastyear, companies would have to pay an 8.75% levy on profit heldoverseas in the form of cash or cash equivalents like short-termgovernment debt. If the income has been used to buy other assets,such as a factory or another company, the rate would be 3.5%.

Those possible savings could embolden companies to spend more onoverseas acquisitions now, said Robert Willens, an independentaccounting consultant.

“The only thing you can do based on what we know now is reducethe portion of the earnings that are held in cash,” Willens said.“If you can reduce the tax rate imposed on those by five or sixpercentage points, that's a good day.”

Intel had $13.6 billion of cash and marketable securities abroadin the end of 2016, regulatory filings show, while Johnson &Johnson's pile was $41.3 billion. Though they're sizable, thosenumbers don't even crack the top five list of companies withoverseas cash, according to a December report from Moody'sInvestors Service. Apple Inc. leads the stockpiling, having amassedsome $230 billion at the end of last year.

“I'd be shocked if we didn't have many more,” Willens said. “Asthese kind of deals increase, there is pressure on their peers todo the same thing.”

Bloomberg News

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