There’s been a lot of questions about why Apple Inc. (NASDAQ:AAPL) would be willing to pay $3.2 billion for Dr. Dre’s Beats Music, a great company no doubt but one that a 2013 deal involving The Carlyle Group LP (NASDAQ:CG) valued at about $1 billion. But Forbes contributor Joe Harpaz may have hit on one of the driving factors behind the deal: tax benefits.
Apple Inc. would have to pay billions in taxes to repatriate overseas cash
“If Apple acquires Beats, it could actually include Beats Legal entities that are based in Ireland. Beats Electronics Holding Limited was established in 2012, giving Beats tax residency in Ireland,” writes Harpaz. “This could allow Apple to make the purchase with foreign funds that have not been repatriated to the U.S.”
Apple Inc. (NASDAQ:AAPL) has billions stuck overseas that it would have to pay 35% to repatriate. Since Apple already has more cash than it knows what to do with, it doesn’t make much sense to bring some of the overseas holdings back home and take the tax hit. But if the Beats Music deal can be structured so that it uses that overseas cash and takes place in Ireland, the actual cost to Apple would be closer to $2 billion (the amount Apple would get from repatriating $3.2 billion).
Apple Inc. – Beats acquisition easier to understand at $2 billion
That’s still double the valuation from last September, but the whole reason for the previous deal was that Dr. Dre wanted to take control of his company back from HTC because he didn’t think it could continue to benefit from the partnership. If HTC sold its stake in the high-end headphone company a bit too cheaply, and Apple Inc. (NASDAQ:AAPL) decided to pay a slight premium to put some of its cash to use and to bring a hip, well-known brand onboard then the whole thing starts to seem more reasonable.
There’s been some speculation that the combination of low valuations, US corporate holdings abroad, and the promise of a recovering economy could spur merger and acquisition activity in Europe. While this isn’t exactly that scenario, Apple Inc. (NASDAQ:AAPL)’s acquisition of Beats Music could be the first in a long line of deals that have to be understood in the context of companies avoiding cash repatriation.