Spending Apple’s Money

One of the pieces of data that came out of the Apple earnings call was that Apple now has about $51 billion dollars in cash and cash-equivalents stashed away. Steve was asked if he would consider some kind of plan like a dividend to give it back to the shareholders, but his response was “no”. There are some investors that believe that a company should keep the minimum cash needed for contingencies, and give the rest back to the shareholders, either in the form of a dividend, or a share-repurchasing. Their belief is that the investors would put the money to better use. I can see the merit of that argument, however, I can also see the wisdom of any company hoarding cash, particularly if you are one that is subject to the foibles of consumer interest and demand.

What knowledge of that cash has also done is fired up the rumour mill of Apple buying something big. People are reading a lot into Steve’s “saving it for something strategic” comment, and many seem to presume that Apple will buy something very, very soon. A deal could be in the works, but just because they have money available doesn’t mean Apple needs to spend it right this instant. Apple has had a warchest of cash for many years now, and they continue to grow their internal fund as profits continue to accumulate. Apple hasn’t bought anyone significantly large so far, why is now all of a sudden the right time to do so? Part of it is the short-term thinking of so many analysts and pundits, part of it is a way to drive traffic to news sites, and part of it is just the fun of speculating on how to spend other people’s money.

The rumours I’ve heard so far include Apple buying Disney, Adobe, Netflix and Sony. All are intriguing targets, and all have their attractions, distractions and downsides.

Disney would give Apple a presence on the content-creation side of their product line, providing fodder for iTunes and Apple devices. Disney, however, comes with a lot of baggage: television networks, traditional movie distribution, clothing and other merchandize, and the theme parks are among the few things that Apple would either have to incorporate into their company, or find a way to spin them off. Getting movies, TV shows, music and games for iTunes is one thing: running a bunch of theme parks and making Mickey Mouse dolls is completely different.

Adobe could make a good fit, and it would give Apple a shot at fixing the issues with Flash they have complained about (some rightly so). Tighter integration with the Creative Suite tools and Apple’s own content creation tools would make things easier. However, Adobe also supports Windows, Linux and some mobile platforms, and Apple would inherit this. Trying to get rid of some of those platforms would simply close off the Adobe products, making it more likely that people would move away from them as preferred technologies for things like multimedia and document interchange. It would force Apple to branch out beyond MacOS and iOS for more than just iTunes and QuickTime.

Netflix might also be a good fit, providing Apple with a ready-built platform for streaming movies. Incorporating it into iTunes makes logical sense (although iTunes has become something of a mess over the years as things get “bolted on”). Apple is already familiar with dealing with iTunes on multiple platforms, but it would mean Apple having to support Android, BlackBerry and others beyond just adding Windows to the mix. That probably won’t sit well within Apple, but from a long-term perspective, makes sense for iTunes as a content delivery platform.

Sony is a wild idea, and on the face of it doesn’t seem to make much sense. However, Apple has slowly been remaking itself from “computer company” to “consumer electronics company”. Sony already has much deeper experience than Apple in these areas, as well as the infrastructure for building large numbers of lower-margin products. Sony has also, culturally, had some passion for industrial design, not just features and functions, which might work nicely alongside Apple’s focus on design. Where Sony falls down is their increasing lack of momentum, and their misses: the Playstation 3 is an amazing piece of technology, but Sony lost the crown as leader of video game consoles to Nintendo and the Wii. Sony no longer commands the premium they once did in home electronics (although they continue to try), and their are a blip on the PC radar. I’m not  sure that Apple would want to own a manufacturer of Windows PC’s, as well as a portable game console that is a (distant) competitor to the iPhone/iPad/iPod Touch.

What would each of them cost? Each of these potential targets currently have the following market cap (all in US$, in billions)

  • Sony: US$34.07
  • Disney: US$68.76
  • Adobe:  US$14.28
  • Netflix: US$9.33

Assuming a conservative 10% mark-up to be able to buy these companies, Apple would need about US$38 billion to buy Sony, about US$75 billion to buy Disney, about $16 billion to buy Adobe and US$10 billion to buy Netflix. Disney is basically out of reach unless Apple resorted to either debt to buy them for cash, or a combination of cash and shares. Personally, I don’t think Disney, financially, is worth it. Sony is a bit a stretch, and while I can see some synergies, Sony would need to be cheaper for it to be worthwhile, and there would be costs associated with winding down some of the businesses that don’t make sense under Apple.

Apple could buy both Adobe and Netflix and still have a bunch of money left over for a rainy day. Both make some sense in terms of synergies, and neither has that much overlap in terms of services or technologies that it would be a problem. Of the four I’ve heard, these two make the most sense.