Categories

I see no major acquisitions in Apple's future

Yesterday I attended the first meeting of the Forum for Growth and Innovation. It’s an initiative where practitioners of Clayton’s Christensen’s theory of innovation can review new academic research before it’s published.

The Forum has another goal: to disseminate and propagate key learnings and ideas. As a keen student of the theory and a blogger, I am eager to provide a gateway for you, my audience, to this management theory.

My modus operandi has been to discuss an industry or a set of competitors in great detail while occasionally stepping back and suggesting a cause for the patterns of behavior we are witnessing. More often than not, the causes are described very well by the theories in Christensen’s writings.

There are cases where the theory does not seem to match. That’s actually the most exciting part of this process. Exception (or anomaly) handling is what allows the theory to evolve and improve.

Yesterday’s event focused on M&A. It’s a cliché to say that M&A is a recipe for failure but there are recipes to follow that minimize the chance of failure. The forum debated these recipes and we were treated to the wisdom from those who learned the hard way what works and what doesn’t. (For example, the ex-CEOs of Best Buy, Arrow Electronics and a senior executive who worked under Jack Welch at GE.)

What I came away with was a new respect for the counter-intuitive and contradictory nature of acquisition integration. What often makes sense on paper like synergies or new growth can quickly turn to a loss of the core business. Recipes for deciding what to integrate and what to keep autonomous are an active area of research.

For this and many other reasons, it’s easy to understand why Apple is reluctant to make large acquisitions. The market discounts Apple’s cash because it is expected to evaporate in a mis-guided acquisition (since that’s what management has shown a propensity to do in most other large US companies.)

I’ve written about why I think Apple’s cash is worth more than other companies’ cash (e.g. Microsoft.) Apple’s reluctance to make large acquisitions and no record of such should provide some hope.

However, I don’t think that reluctance is simply a coincidence or a lack of suitable candidates for acquisition. I think it’s more a result of the company’s processes and priorities. As long as the team in charge is focused on the details of execution and integration, and as long as acquisitions are complex and fraught with unknowable risk and lack of control, I see no acquisition in Apple’s future.

  • Steven Noyes

    Horace,

    What is your view on Apple's acquisition of NeXT? I ask this because I always saw this as the big company buying the little company and the little company being completely assimilated by the little company. With the exception of QuickTime, almost all of Apple's current software technologies like iOS, OS X, Cocoa, Objective-C come from the NeXT acquisition. I would say much of the corporate mentality and industrial design as well.

    I have viewed the Apple/NeXT acquisition it as NeXT simply getting a killer brand name.

    • ChuckO

      I'm with you. I go back and forth between wether Apple is really NeXT or if NeXT was the true Apple all along. I've come to the decision it's basically the same either way.

    • asymco

      Indeed NeXT can be considered a reverse acquisition. When Apple acquired NeXT it was having a near-death experience. Those kind of experiences are exceptional and not often repeated. They are also the pre-requisites to dramatic and life-changing decisions (for companies and people too.)

      So I don't see a decision process when one is facing the abyss as the same as the one when the company is bathed in adulation.

      (I should point out that Nokia during its history also faced a similar abyss, so much so that the CEO committed suicide. Motorola faced it and went through a disembowelment. These things are not pretty.)

    • Hamranhansenhansen

      NeXT also got hardware channels, 3rd party software library, userbase, Jon Ives, patent library, much more.

  • RobDK

    Whilst Apple on paper bought NeXT, it is clear it was a reverse takeover in that it was Jobs and the senior management from NeXT that took over Apple. In a way, it can be said that Apple was the vehicle for Jobs to realise the NeXT OS-dream. The advantage of the reverse takeover was, of course, that Apple had a strong image and brand value, although struggling financially.

    Also, one really cannot compare Apple before 1997 and the NeXT takeover, with the Apple of today. They are two separate companies, as the product line, balance sheet and stock price show!

    • dchu220

      Similar to when Cingular bought AT&T but kept the AT&T name for marketing purposes.

  • http://twitter.com/TektonikShift @TektonikShift

    Apple stays away from risky, bleeding edge new technology.
    When it does adopt an emerging technology, it shares the risk by co-developing with a large established company.

    A big acquisition is the business equivalent of "risky, bleeding edge new technology".
    Apple is deaf to the sirens song of synergies thru big acquisition's.

  • Russell

    Horace,

    Good read. If Apple decides not to aquire growth, then the other alternatives for all that cash now and to be made in the future are: share buybacks, dividends, R&D for further innovation, expansion, etc.

    Perhaps in the nearterm (5 to 10yrs) using the cash for further expansion would make sense. Further out, once this cycle enters a slower growth phase, I could see a dividend being a possibility longterm. Don't know if they would aquire another company to eliminate a threat. It doesn't appear to be how they would react.

    Cash is good. It gives you the options. These are good problems to have for a company.

  • Alex

    People rarely talk about the biggest benefit of large acquisitions, which is removing competition from the field of play, because it's hard to quantify the results. See Microsoft in the 90's or Amazon currently (see their Zappos or Diapers.com acquisitions). Getting rid of the competitions is especially beneficial in growing markets. But the strategy is often ignored by financial analysts because you can't directly correlate revenue gain from the acquisition, especially in growing markets. And the strategy is not spoken about by companies because of regulatory reasons.

    • Yowsers

      I'm still undecided about the removing competition via large acquisitions. So many large acquisitions for that purpose seem to become one of those over-priced, core-business diluting bleeding mistakes mentioned above.

      But "removing competition" is an overbroad term. I understand it more as getting market share via customer lists, entries into new regions, consolidating suppliers, and for acquiring a rival's patent portfolio. Oracle has done this a number of times — I'm not sure of the results of it, but I haven't heard negative press around Oracle's moves like you saw with HPs take-over of Compaq and the like.

      • http://twitter.com/Niilolainen @Niilolainen

        i think people do use the phrase "taking out a competitor", but it always strikes me that the acquirer should seek donations from other competitors in the market, as they too benefit just as much, if that is the only logic.

    • kevin

      I've never seen Apple make an acquisition in order to remove competition. Apple's thinking is that it can out-innovate any competitors, and disrupt any market at the proper time, so there is no need to remove them by overpaying for it.

      Apple aims to buy technology and staff for the purpose of speeding up its ability to out-innovate and disrupt (or in few cases, arguably just to achieve a more complete and competitive solution).

  • Steko

    Another reason for an acquisition would be for IP reasons.

    HP bought Palm for 1.2 billion. Though it's unlikely Apple would have bought Palm due to animosity (the HP offer surely came with guarantees for personnel) the Palm patent library alone would probably have been worth that much in Apple's lawsuits. Apple does seem to be going after smaller targets though (sensibly); either for the IP or the personnel or both.

  • TomCF

    A large acquisition would have to be for technology that Apple could not build itself, but necessary to its products.

    • PatS

      I agree they could use to spend on some 3G/LTE patent coverage. Otherwise they will be either paying the trolls or royalties forever. My choice is Interdigital because they are the only IP pure play.

  • http://twitter.com/Niilolainen @Niilolainen

    "It’s a cliché to say that M&A is a recipe for failure"

    Yup. It all depends on the price. The most successful acquirers have very clear models for what synergies they want to achieve, they come to a firm view on the value of the deal, then discount that value for risk and they stay disciplined in terms of the final consideration paid. They then maintain that disciplined attitude thru PMI that might last 3 yrs and make sure they realise the value identified before the acquisition.

    • dchu220

      Synergy usually means you can fire a management, sales and accounting staff.

      Hard part is getting two different cultures to work together.

      • http://twitter.com/Niilolainen @Niilolainen

        Synergies might also be access to new sales channels or even a new sales force.

      • dchu220

        Good point.

  • http://twitter.com/Niilolainen @Niilolainen

    Would be amazed if Apple bought anything at >50M-100M USD valuation. Anything bigger would start to be dilutive to Apple's culture.

    • http://twitter.com/Niilolainen @Niilolainen

      These kind of small deals are basically about acquiring talent. And I bet Apple finds PMI of these deals relatively easy, because after-all, who wouldnt want to work for Apple?

    • Steko

      They've made at least 4 such acquisitions in the last 3 years:
      PA Semi ($278 mil)
      Quattro Wireless ($275 mil)
      Intrinsity ($121 mil)
      Siri (~$200 mil)

      Since they're seeing jury awards of $3-5 bln I would consider that the high end price for things Apple is going to acquire. More likely we'll see then use cash to get exclusivity arrangements on certain technologies.

      • http://twitter.com/Niilolainen @Niilolainen

        I stand corrected. Didn't realise those acquisitions were that big.

  • Duncan

    The only acquisition that I can think makes sense for Apple is if Netflix offers itself up for sale. Not only are the existing licenses with the content providers valuable (assuming they can survive the sale), but the idea of letting that service fall into the hands of a competitor must keep Apple awake at night. As it is, Apple is dependent on Microsoft (via Silverlight) for Netflix to play on a Mac. I'm not sure what DRM mechanisms Netflix uses on iOS devices though.

    • r.d

      you do know that NFLX is publicly traded company with market cap of 9.7 billion.
      So Apple would have to pay premium price of 13-15 billion. I don't think
      it is worth it especially when hollywood will put the squeeze on it very soon.

    • dchu220

      The strength of NetFlix is that is available across many platforms. If any company were to buy them out and cut out competing platforms, another company will easily step in. Buying Netflix would be a waste of money.

      That said, I don't think Apple cares to acquire any company unless it can exclusivly add value to their platform.

      • Duncan

        There's no question that one of Netflx' appeal is its availability on multiple platforms, but there again so is iTunes (well, two platforms, anyway.) While it's also true that Apple has the resources to build Netflix themselves, so far they have fallen far short in terms of content. IF Netflix' current licensing agreements could survive an acquisition, whoever might buy them gets a lot of valuable content up front.

        But there again the gaps in Netflx's streaming vs. DVD titles indicates that even they must be beholden to the studios (unless the backlog is strictly the result of the time it takes to transcode everything, which seems doubtful.)

        In any case, I wasn't aware that NFLX had such a high valuation. That pretty makes all of this moot.

  • John

    It is hard to imagine Apple making a major acquisition that they would integrate with the main office. I suppose it is possible they’d buy something and keep it at arm’s length like Filemaker. For exame, what if they bought a credit card company or bank of some sort to allow the iPhone to act as a credit card? That would be powerful acquisition but not one they’d want to integrate with the engineers and designers in Cupertino.

  • timnash

    Large M&As take up large amounts of management time. Time that could be spent on growing existing business. This opportunity cost is difficult to quantify and so is rarely discussed but is often a reason that competitors can pick up market share during the integration phase.

    It seems a major reason for large acquisitions is the CEO of the acquiring company running out of ideas. The acquisition normally buys the CEO another 18 months at the top, even if the purchase isn't that successful.

  • Speegle

    I think they're saving up to buy Verizon. ;)

  • CndnRschr

    They certainly are not going to be buying back shares at the current value…. Also, returns on cash are at an all-time low. So why not some carefully placed acquisitions? Of course, in addition to the companies named by Steko, Apple has made significant real estate investments in both Cupertino and North Carolina for the data center. No problem with merging cultures there and it also benefits from depressed real estate markets (off-setting the low gains from interest rates). Apple is building for the future and also locking in flash RAM and other key parts to contain costs. Great financial planning compared with the air-head DotCom M&As. Google seems to be buying everything that moves. $5 billion for GroupOn?

    Netflix has licenses but has no monopoly on infrastructure, devices, or anything else. Apple knows a lot about media licenses and there are likely acquisition clauses in the deals Netflix has which would specifically preclude certain owners. The media companies are paranoid about losing their current business model (which was lost about 2 years ago). They can still make money – a ton of it – but are grasping at their iconoclastic systems.

    Anyone know where advertizing rates are now? Surely these have taken a hit with the recession. Must be impacting the buyers (and sellers).

    • asymco

      I would certainly agree that there are many options, but I don't think the decision on share buybacks will have anything to do with current share price. By definition, the market defines the value of the company. I don't think it's management's job (or skill) to be timing the market.

  • dubTX

    Also consider that iTunes was a software product that Apple acquired. So was the "Cover Flow" component. They'll buy some of these little clever products at relatively tiny prices for products that they wish they had made, that they want to be a part of everyone's Mac or iOS experience.

    Consider: Cover Flow is now part of the Mac OS as a means of browsing through the file system. Not just an album art thing anymore (which I believe is all it was as a separate company's product).

    All these goons that hate Apple for not issuing dividends and obliterating the cash hoard are typical short-sighted quick-flipping stock traders, or worse, they're an industry analyst. (Horace, you are gross outlier, thankfully.)

  • Hamranhansenhansen

    Apple/NeXT is not a typical acqusition. In the 1980′s, Apple and the Mac were forked Apple/NeXT, and in the late 1990′s, the 2 forks were reunited. There is a lot of NeXT influence in the result because NeXT “won”. Steve Jobs was right. Consumers and other non-technical users really did need Unix and the Internet and object-oriented rapid development tools under their Mac interface, which of course enabled the Web to be invented on NeXT.

    QuickTime is not the only software that is left from the non-Jobs years, though. There is also Apple Events and AppleScript, HFS+, TrueType, Carbon, Inkwell, and more. And in the apps, iTunes, Final Cut, and Logic are Carbon apps, they are classic Mac OS apps.