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Zeus Kerravala
Zeus Kerravala is the founder and principal analyst with ZK Research. Kerravala provides a mix of tactical advice to help his...
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Zeus Kerravala | August 28, 2011 |

 
   

Dear President Obama: For the Sake of the Economy, Grant the Repatriation Holiday

Dear President Obama: For the Sake of the Economy, Grant the Repatriation Holiday Companies like Cisco could use the cash for acquisitions and job-creation.

Companies like Cisco could use the cash for acquisitions and job-creation.

Every quarter following Cisco's earnings call, the company hosts a roundtable with John Chambers and a handful of industry analysts. I've been lucky to attend these over the past few years and last week we had our latest roundtable. As expected, much of the focus of this roundtable was on Cisco's current issues and how the company works its way out of the malaise it has found itself in for the past couple of years, and that led us to the discussion of the repatriation holiday and the implications of whether or not it passes.

For those who aren't clear as to what a repatriation holiday is, it's an event where US companies are given the opportunity to bring money earned overseas back to the US at a tax rate of 5-6% instead of the current top rate for businesses of 35%. The theory being that companies could invest the money domestically, by hiring more people, investing in research and development or acquiring companies. Without the tax holiday, US corporations can only use the money to invest outside the US.

A big part of what made Cisco the company it is today was its ability to grow through acquisition. Over the past few years Cisco has struggled to grow, and many experts believe that a wave of acquisitions could be the thing Cisco needs to kick start itself again. What might Cisco acquire? The market is really wide open depending on what adjacencies Cisco wants to move into. I wouldn't be surprised to see them buy any one or more of the following: Acme Packet, Palo Alto Networks, Fortinet, Riverbed, Silver Peak, Citrix, F5, EMC, Network Appliance, A10. Some are more likely than others, but an argument can be made for each one of these. However, without the repatriation holiday, none of these will happen.

Although Cisco is currently flush with cash, most of the US-earned cash has been used to buy back stock and other activities to give the stock price a boost (which has its own benefit to the company and the economy). The only significant acquisition Cisco has made over the past couple of years was Tandberg, which was headquartered overseas, meaning Cisco could use its foreign cash to make the acquisition.

In fact, I specifically asked Chambers about Cisco's investment strategy in the face of not getting the tax relief on repatriation; he made it very clear that the company would need to over-weight its investments overseas because so much of the cash of the company is now outside the US. As an example, he pointed to the fact that Cisco has been beefing up its CRS-3 team by hiring people in Ottawa Microsoft is currently building a facility in Vancouver, BC as well. Microsoft also bought Skype, which is headquartered in Luxembourg. Coincidence? It's clear in my mind that Cisco and other companies will dig their heels in and hope that Congress grants the holiday.

I fully understand the critics who oppose repatriation. The last repatriation holiday was granted in 2004 and over $300 billion was brought back to the US. In 2004, many companies that brought back cash into the US used the money to buy back stock, increase dividends and pay bonuses. In fact, very little of the money was actually used for job growth.

With that understanding, I don't think we should allow the more wealthy companies like Cisco, Apple and Google to bring the cash back tax free and then use it solely for the benefit of the shareholders and executives. Simply looking in the rear view mirror and using 2004 as an example is short sighted, though, and doesn’t solve any problems.

Congress should grant the tax holiday but then put conditions on the use of the cash--for example, not allowing the cash to be use to repurchase stock or boost dividends. Instead, the cash should be used to add jobs to US offices, open new offices or acquire US companies. Additionally, if a company is acquired, they should be limited in the amount of headcount reduction that can be done in the first year, so we won't have the situation where acquisitions actually significantly cut jobs.

The act of repatriation would also bring in additional taxes to help pay down the national debt. One could argue that it might cost money over the long term, but it's unlikely that companies will bring the cash back without the tax break.

Personally, I'd love to see Cisco go back to its shopaholic ways. The company's stated direction of having more products work together, faster, indicates that it would make more big acquisitions if it had the chance. President Obama, cut a deal with corporate America to help get the country rolling again.





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