Apple Buying Something Big? How UnAppleish
Most of us look at Steve Jobs with a certain amount of envy. The guy has a ton of money; he is widely respected, scoots around in a personal jet and is privy to all the secrets in Apple land. On the other hand, you have to wonder just how much of that he'd trade to have a pancreas.
Health issues aside, life as Steve Jobs probably isn't as great as most of us think it would be. Sure, he runs Apple LIKE A BOSS, but running Apple puts Steve in the spotlight. Every single utterance is dissected for a secret meaning, every trip is reported and even his unlicensed car is fodder for the many chefs preparing the daily stew of Apple news for consumption by the masses.
Having every single word analyzed, every nuance microscopically examined is something most of us aren't ready for. If you were Steve Jobs and had a bad breakfast, your dissing of grits, while honest, could move the corn futures market substantially. So since Steve Jobs knows what he says is far reaching he says things with great care*.
All this explains why people are wondering just what company Apple has its sights on when Steve said:
We strongly believe that one or more very strategic opportunities may come along that we're in a unique position to take advantage of because of our strong cash position.
That gets the gears turning. Is Apple out to buy a major company? Here most assume Apple is mimicking the behavior of an eight-year-old boy flush with allowance and birthday money. The kid saves and saves and then he blows it all in an orgy of Lego buying. If we take Steve's comments at face value that is exactly what we should expect. Whether or not Steve is being direct or not the speculation begins. Just what giant company would Apple buy?
The way most people look at the possibilities is to take Apple's cash on hand find the current valuation of a company and see if Apple's cash reserve minus the cost of the company is greater than zero. Which is understandable but simplistic. You've got synergies to consider, stock swaps, leveraging and other arcane business terms that add up to Apple's cash pile not being wholly relevant in the discussion. So forget about valuations and look at the list of some of names being bandied about:
Sony
Why: Apple is not Apple Computer any more; it is Apple Inc. maker of consumer electronics. Sony makes consumer electronics. Therefore, Apple should buy Sony. Plus, you know, Play Station and all.
Why not: Sony has around 150,000 employees, layers of management and a very diverse product line. A beast this size isn't something Apple can handle with just the managers the company has in place. Plus, why bother buying a company when you routinely beat the living tar out of them? Sony Bean anyone?
Adobe
Why: Adobe makes some amazing software. Why if Apple had Adobe it could fix Flash and everyone would benefit!
Why not: While Adobe cranks out some amazing software the company also turns out some amazingly crappy software. How does owning Adobe put Apple in a better position? Sure, Apple would almost completely own the market for video editing and so forth, but Apple already has as much of that market as the company wants. There's just no reason to buy a company when you can out compete them.
Why: Right now Facebook is the king of social media. Think of integration with iTunes, and how fast people would forget Ping. Can there actually be a downside?
Why not: Sure social media is king right now but that's right this second. At one time getting on the Internet was king and AOL bought Time Warner. Where's AOL now? Buying a flavor of the month company during flavor appreciation month isn't a great idea; you almost always end up over paying and Apple doesn't like to over pay.
AMD
Why: AMD makes chips, chips that power computers. AMD also makes graphics chips, chips that power computer graphics. Freedom from the chains of Intel!
Why not: Intel is the best thing that happened to Macs since the return of Steve Jobs and what would be the point, Apple already makes chips for the big products of the future: the iPad and iPhone.
Disney
Why: Steve Jobs gets paid. Steve is the largest Disney shareholder, so a buyout would net him a huge amount of cash.
Why not: Where is the upside for Apple? There just isn't one. Disney and Apple are in completely different markets. Unless Apple is planning on actually opening an Apple Land outside of San Francisco with a roller coaster that mirrors Apple's stock price there is no reason to bring the imagineers of Disney into the Apple fold.
While Steve might have an entirely different company in mind than one of these names, the companies people are mentioning, as likely contenders just don't seem that likely. For all the chatter about Apple and innovation Apple has always valued the bottom line more than anything else. Google has made a mint off of GMail, but Apple couldn't stomach the idea of providing iTools for free.
Why would Steve talk up a big buyout/merger if it weren't on the horizon? Recall Apple's cash position. Apple has tens of billions in the bank and no debt. That's a problem. First shareholders see that money as theirs and rightly so, the shareholders own Apple. Second, Apple gets a terrible return on the cash the company has amassed. The bigger the pile gets the more it is going to gnaw at shareholders. Because of Apple's conservative investment strategy, it is easy to view those billions as actually doing nothing.
Steve's pronouncement remains puzzling, while Apple has a track record of acquiring smaller companies; the company has never ventured into the arena of the mega merger. With that in mind, it is easy to think that Steve was just bluffing to calm down those who want a dividend or a stock buy back.
*Debatable. He's been giving plenty of free pub to Android.
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Comments
So are you saying that there is no company that Apple could acquire to its (Apple’s) benefit? You might be right. Though one wonders might there be some totally unrelated moribund industry where an application of the “Apple Way” can completely revolutionize things? Automobiles? Airlines? Department stores? Just shooting the breeze.
Why not dividends?
@tundraboy
I’m sure there is something Apple could buy and make a huge splash but I am skeptical that any of the commonly companies are one of them. I think your guesses actually make more sense.
@Howard
Well that makes a lot of sense but Steve seems diametrically opposed to the idea of dividends. The last time I recall him publicly asked about dividends it was at a share holder meeting where some one in the audience said:
“You’re not planning on a dividend right?” and the response was:
“You’ve got that right”
Not that Steve is oblivious to shareholders but he’s sees the cash as belonging to Apple and expects investors to get there gains by the increasing value of the stock. It makes sense, the more cash Apple has the more the stock goes up (in theory anyway) but if the stock stalls I’d expect people to start clamoring for a dividend.
Apple is trying to save enough money to buy Microsoft.
I too can not find a suitable “target”.
Sure, consumer electronics like Sony… but which company fits more cleanly?
... can’t find their valuation).
A mobile phone company? (Nokia is too expensive I think
I wonder about a home automation company… but none are very big, are they? Similarly could they buy out some big business telephone system producer…. like a Nortel?... something that allows them to better define the future of collaboration & video conferencing. I just don’t see the right fit though.
I’d hate to see them buy a production studio (like MGM, or NBC if it was available), I would rather all studios saw iTunes as a distribution partner rather than see as a competitor. And yet buying an international network like “Discovery” (and reinventing how TV is shown) would be interesting.
No to dividends because it gets taxed as current income. AAPL should be viewed as a vehicle for long term investment because of what I believe is its humongous long term upside. Apple is doing the right thing when it doesn’t pay dividends—it rewards the long term investors by not subjecting them to involuntary and higher taxes. (You can’t choose when to take the dividends but you can choose when to sell your stock.)
As the largest consumer of flash in the world, AAPL might seek additional vertical integration and margin improvements by owning their own fab instead of outsourcing.
Especially since they’re now getting into serious chip integration (as in fabbing RAM directly into the CPU on the A4).
reinharden
I thought about it some more. Apple is building a server farm and they sell computers and mobile devices. So they have the two ends of the cloud computing model. I’ve always said cloud computing will not really take off until the bandwidth problem is solved. There are two components to that problem, one is technological—simple throwput. Cloud computing requires the ability to move lots of data. The other one is structural—the bandwidth providers have the Googles, Apples, and Netflixes of the world at their mercy.
So, I think Jobs is piling up the cash because sometime down the road he expects he will need to free Apple from the threat of being held hostage by the likes of Comcast and Time Warner. And the only way to do that is to own your own pipes. Either by acquiring Comcast or Time Warner or by building your own.
The wild card is the state of wireless technology. If wireless throwput and reliability reaches the point where it can replace wired internet transmission, then for Apple building its own wires just got cheaper. I look forward to a time when I only need one ISP for both mobil and desktop needs. That’s probably the nightmare scenario for the cable & DSL providers.
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