(MoneyWatch) Apple (AAPL), until recently the corporate equivalent of a financial printing press, just sold $17 billion in bonds. For the first time since the 1990s, the company will have debt on its balance sheet.
The deal -- reportedly the largest in corporate history -- was overwhelmingly popular, as the number of requests was nearly three times the offered amount. All for low-interest bonds. What is going on? It's all about investors and the cost of money.
Investors have been terribly disappointed with Apple of late. Between falling gross margins, a lack of exciting new products to drive off competition, and challenges in China, the company's stock has lost its bloom. As of this morning, it is coasting just below $440 a share, a long fall from the 52-week high of $705.07 and far from the $1,000 level and trillion dollar market value that some bullish analysts insisted was just around the corner. That leads to the five-step explanation of why Apple has offered debt instruments to the markets.
1. Apple feels it has to bribe investors
There are two major reasons investors pick particular stocks. They either expect strong growth, particularly in the tech realm, or they want mature stocks that will deliver value in the form of dividends and buy-backs. Apple used to have growth that was unparalleled. Now, while still growing at a rate that most companies could only dream of, the old days seem over.
Last year, Apple announced its first dividend since 1995. For a company of Apple's size and recent history, the giveback has to be significant. The announcement then was expected to cost $2.5 billion a quarter.
But Apple's made of money, right? CFO Peter Oppenheimer said the company has $145 billion in cash. So what's the problem? Actually, there are two of them.
2. All that profit overseas
One of the problems is that even though Apple has a ton of money, much of it is overseas and not recognized under U.S. tax law. If Apple brings it home, the government would want its 35 percent -- the corporate tax rate that now exists.
The amount otherwise available to Apple is much smaller. Look at the latest balance sheet and you see cash and cash equivalents of only $12.05 billion. That's nothing to sneeze at, of course, and there's another $27.08 billion in short-term marketable securities. Still, $10 billion a year is a large percentage of the $39.1 billion officially recognized.
3. Apple's margins
The other problem is an ongoing one.and will continue to do so, at least into next quarter, according to the company's projections. Gross margins, or the percentage of sales that aren't taken up by direct costs of making products, are the cap on how much money a company can actually make from the business after expenses.
Even though gross margins of between 36 percent and 37 percent as projected by Apple for next quarter are far above industry average, as my colleague Tim Beyer at The Motley Fool mentioned to me in a Twitter discussion, that is far less than the 47.4 percent Apple was getting a year ago. The smaller the margin, the less cash can get thrown to frustrated investors.
4. Apple likes cash
Apple has kept lots of cash around for the same reason its competitors do. Money is leverage that makes opportunistic purchases, the use of its supply chain as a weapon, acquisition of technology, settlement of legal disputes, and other expensive aspects of business much easier to manage.
But it has to send significant cash to investors to placate them, the old money streams aren't as full as they were even a year ago, and much of the cash that comes in is left overseas.
5. Borrowing is cheaper than repatriation
Apple needs more cash to keep going. Bringing in profits from overseas is expensive. But interest rates are still historically, and ridiculously, low. Currently, Standard & Poor's has Apple bonds at the same rating as U.S. Treasuries. But the trick is Apple is paying a bit more, so it has people lining up for a better "safe" return, which means it gets the cash it needs and loses relatively little.