Wednesday, December 19, 2012

Why Apple Never Goes Big

It's no secret: Apple (Nasdaq: 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.

Apple Stock Chart by YCharts

This chart doesn't include long-term marketable securities of $55.6 billion, which are generally included in Apple's cash-equivalent figures, but the trend is clear.

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 a 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 streamer Netflix (Nasdaq: NFLX  ) or game maker Electronic Arts (Nasdaq: EA  ) . 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 (NYSE: SNE  ) , which has a $17.6 billion market cap. Don't even get me started on the Disney (NYSE: DIS  ) idea, since the iconic animator's market cap is $66.4 billion. That capitalization is already more than 130 times 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 (Nasdaq: 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 (NYSE: 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.

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