Why Apple never goes big

Buy out Netflix? EA? Never.

By Motley Fool Pick of the Day Dec 28, 2011 4:46PM

By Evan Niu

 

It's no secret: Apple (AAPL) is loaded.

 

Over the years, it has been steadily growing its cash hoard, and inevitably the discussion leads to the same question: What should Cupertino do with its mountain of money? The two most popular suggestions are always a dividend and ginormous acquisitions. The Mac maker now has $81.6 billion in cash and investments sitting on the balance sheet, and that doesn't include long-term marketable securities of $55.6 billion, which are generally included in Apple's cash-equivalent figures.

 

You have to remember that as astounding as its coffers are, $54.3 billion, or two-thirds of the total, is sitting overseas, in part because of repatriation taxes. That leaves about $27.3 billion here stateside.

 

What about a dividend?
When it comes to a dividend, let's say the company wanted to start paying one -- and it could under CEO Tim Cook. Other dividend-paying tech giants such as Microsoft and Intel pay dividends yielding around 3%.

 

With shares hovering around $400, even a more modest 2% yield comes out to $8 per share annually. There are just under 916 million shares outstanding, which would bring the total annual dividend bill to about $7.3 billion for the year. That's using more than a quarter of the cash Apple has domestically to work with. As a shareholder, I prefer the status quo.

 

What about acquisitions?
Just because Apple has a full magazine of potential elephant ammo loaded into its gun, that doesn't mean it should trigger-happily start unloading at anything that moves and looks remotely appetizing. Instead of using a shotgun or bazooka approach, Apple prefers to use a sniper rifle: uncovering smaller targets from afar and selectively picking them off with focused precision when the time is right, efficiently saving rounds for future battles.

 

Apple will never buy a company like video streamerNetflix or game makerElectronic Arts. Never.

 

Its largest acquisition to date was just this month, when it acquired Israeli flash-memory specialist Anobit for an estimated $500 million. A Netflix acquisition would top $5 billion, more than 10 times its biggest buy. EA would probably cost at least $8 billion.

 

The rumor mill has even targeted Sony (SNE), which has a $17.6 billion market cap. Don't even get me started on the Disney (DIS) idea, since the iconic animator's market cap is $66.4 billion. That capitalization is already more than 130times the Anobit acquisition, before you even include any type of premium.

 

The hit list
Look at the companies Apple has acquired, and you'll immediately see why big household names never fit the bill. Here are some acquisitions over the years and their estimated prices.

 

Year

Company

Estimated Price

Intended Use/Purpose

1996

NeXT Computer

$404 million

Steve Jobs, Mac OS X

2005

FingerWorks

Unknown

Multitouch

2008

P.A. Semi

$278 million

A4, A5 processors

2009

Placebase

Unknown

Maps app

2009

Lala

$17 million

iCloud, iTunes Match

2010

Quattro Wireless

$275 million

iAd

2010

Intrinsity

$121 million

A4, A5 processors

2010

Siri

$200 million

Siri

2010

Poly9

Unknown

Maps app

2011

C3 Technologies

$267 million

Maps app

2011

Anobit

$500 million

Flash memory

 

This isn't a comprehensive list, but it shows some of the more important buys. Notice the absence of the word "billion" anywhere. Before acquiring Quattro, Apple was in a bidding war with Google (GOOG) over AdMob, which Big G ended up winning for $750 million.

 

Steve Jobs had always favored small acquisitions of companies with solid technology that would allow Apple to build an offering from the ground up, as opposed to making a huge purchase of an established company that would be harder to integrate into Apple's culture. That's unlikely to change under Cook.

 

Keeping its acquisitions small is what allows Apple to have such a low intangible-assets ratio. Out of its current $116.4 billion in assets, only $896 million is goodwill and $3.5 billion is acquired intangible assets. That reduces the risk of having to eat goodwill impairments and other accounting charges if things don't turn out well -- just ask Hewlett-Packard (HPQ) how much Palm hurt.

 

Acquisition speculation: the new baseball
If Apple wants to get into video streaming -- which it probably does in preparation for a real Apple TV -- it wouldn't buy Netflix. It would buy some small streaming shop you've never heard of that has a good technological foundation and could be easily integrated.

 

The same would be true if it wanted to get into mobile-game development and EA, but it doesn't. Cupertino recently pulled its only iOS game, Texas Hold 'em, from the App Store. Why take the risk within one of the most competitive platform environments when it can sit back and just collect its 30% cut?

 

Next time you hear some bizarre far-fetched rumor that Apple is thinking of buying some major brand name for billions of dollars, feel free to brush it aside. The stories are bound to come up periodically, since acquisition speculation in the stock market is becoming a national pastime. Just remember that pastimes are for recreational purposes only.

 

Fool contributorEvan Niuowns shares of Walt Disney and Apple, but he holds no other position in any company mentioned. The Motley Fool owns shares of Apple, Microsoft, Intel, and Google and has bought calls on Intel.Motley Fool newsletter serviceshave recommended buying shares of Netflix, Walt Disney, Intel, Apple, Google, and Microsoft and creating a bull call spread position in Microsoft. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.


31Comments
Dec 28, 2011 8:54PM
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Spend some of that cash on building a state of the art manufacturing center located in the United States, employing Americans. then spend some of that cash on paying severance packages to the Communist Chinese workers whom are about to feel the pain of outsourcing.
Dec 28, 2011 6:04PM
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"I wonder if Apple TV will fix the problem of nothing good on to watch.  LOL"

Doubtful.  Apple TV is hardware, not content.
Dec 29, 2011 1:03AM
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apple is not for you folks on this board
Dec 28, 2011 9:18PM
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It always makes me laugh when some expert recommends buying a stock that they do not own and have no intentions of buying anytime soon. 

 

If its not good enough for you then its not good enough for me.

Dec 28, 2011 11:37PM
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Apple is looked upon as this great american high tech company yet it holds most of the billions of dollars in cash overseas to shied it from US taxes. It is very obvious that their business strategy works but sometimes money shouldn't be the only factor in a company's decisions. Companies like Virgin based in the UK give away billions of dollars in humanitarian aid, employees are very well treated to a point where employment is virtually guaranteed for life (barring honesty conditions) as well as many other european companies large or small. Should unemployment be necessary, employees are given 90% of their paychecks until suitable employment is found for them. I don't hear very much about Apple's humanitarian efforts ( unlike microsoft's Bill Gates who gave away most of his personal fortune to humanitarian causes). At the very least bring that money "home", pay your fair share of taxes and provide the many unemployed with decent jobs.
Dec 28, 2011 9:01PM
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Trickle down economy doesn't work because greedy bytches always hoard.
Dec 28, 2011 9:00PM
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Well they could spend some on product support, I know of 6 people who had a Iphone 3gs that crashed when Apple went to the new IOS 5.0.1 and Apple isn't providing support for their software problem.  Deals like this will make a company slide in a hurry.
Dec 28, 2011 5:17PM
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I wonder if Apple TV will fix the problem of nothing good on to watch.  LOL
Dec 29, 2011 2:00AM
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Apple should spend its extra money on scholarships for American citizens.  It will provide them a greater base of clients, customers, and employees. 
Dec 29, 2011 6:47AM
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Well if Apple had to pay fair taxes they would hire American to get the tax credits needed to keep their taxes down. And FYI for all you idiots out tere shipping our jobs to China or some other craphole makes them about 75 cents per iphone extra profit is all but would save them in quality if parts were still made here as well. The amusing part is their shipping jobs overseas not only affects us but because many of us can no longer afford to buy over-priced crap that needs to be replaced every year or two they are starting to suffer the affects as well.
Dec 29, 2011 9:32AM
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My dream is to invent something, build it in the USA,  hire Americans and put greedy so called American company's like Apple out of business. Is there any American businessman except for the Wiffle Ball Bat Company and New Balance shoe company willing to show some pride. When are Americans going to take a stance and start caring about where its's made. When are we going to realize that its not the Democarats or Republicans fault for the economy. No company wants to hire Americans. The only rule for a good invention is greed.

 

Nike is worse than Apple. 1.4Billion in Athletic endorcements and no US jobs. If Tiger Woods took only half of it 36Million is gets from Nike. They could easily build a factory and hire Americans with 18Million. But until we stop drinking the Asian Kool Aid we will continue to be Lemmings.

Dec 28, 2011 10:57PM
Dec 28, 2011 10:03PM
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I prefer the status quo?

What happens when the stock tanks or is shorted by hedge funds and drops to $200?

Supposing the author had three thousand shares? Two percent would mean $24,000.Is this chump change? How many institutions have over three thousand shares? How many would enjoy some injection of cash during this gloomy season?

Dec 29, 2011 3:57AM
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Apple is innovative, or was when Steve Jobs was there. What will happen now? is there anyone  left at Apple who is as creative as Steve? I think not. and thats too bad because there are no big companies left who challenge themsleves and want to reate new gadgets for the masses. We are now i a position to "take it or leave it" this is what the companies will offer and if we dont like it, too bad. We need another Steve Jobs!
Dec 28, 2011 11:05PM
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Apple never go big or buy big, why? the answer can be found in its innovation of originality. Apple peoples such as co founder the late Steve Jobs launched their product by following the MONEY. For Mr Jobs, its not about a name for himself or seeking fame. Innovation of origin is his adventure to making billions of monies. This is why Apple does'nt care to purchase known establishments. Consumers curious about new items in the market place that have return billions of monies to the creator of such product. So its about following the money from start to infinity.  Buying out a business need innovations of fresh start and is never usually starts well because consumers are aware of the negative/ positive experiences. Originality has no suspicion of fault until it is experienced. Mr Job knew that as well as Mr Gates.  
Dec 29, 2011 12:16AM
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I wonder how much is in European banks that are about to go under???
Dec 28, 2011 10:48PM
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I for one encourage the dividends. A bird in my hand approach. SHT can happen then it's too late. Been a party to too many class actions.
Dec 29, 2011 2:46AM
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Buy a railroad and make it a high speed rail.   Apple could....

 

Dec 28, 2011 9:17PM
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How about taking a few bucks and fixing your stupid iTunes store website so I can get it to open and maybe enjoy buying something...if not I'm sure I could always just find some free music somewhere and forget about itunes...just saying fix it or I delete it from my computer.

You have two days and I'm over you apple asshat's.

 

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