Is Apple a candidate for acquisition?

As shown in the Apple growth scorecard, the company’s earnings growth is continuing at 75% with the top line increasing at the annual rate of 70%.

The $59 billion of cash on the balance sheet has reached the equivalent of $64 per share yielding an enterprise value of $263 per share based on closing price of January 21st.

The stock price has been rising but not outside a narrow P/E band. The following chart shows the stock price and the 15 P/E and 25 P/E bands that have bounded it for nearly three years.

As previously observed, this overall share appreciation is not accounting for the growth in earnings.

The trailing twelve months’ earnings were $17.91 per share. Therefore the P/E ratio is now 18.2. Excluding cash, the P/E is at 14.7. However, that’s based on 2010 levels of earnings. Those earnings are increasing very quickly.

To account for earnings and their growth, I developed the following chart which shows the P/E and P/E/trailing-Growth for the stock.

The P/E is fluctuating on either side of 20 but when considering trailing growth, comparable companies, the macroeconomic conditions and guidance the value of the company is reaching new lows.

P/E/tG nearing recession lows

Earnings were 75% higher in 2010 than the year before. So based on the growth, the rule-of-thumb ratio P/E/trailing Growth (P/E/tG) is 0.24. This ratio (where 1.0 is seen as “fair value”) is the lowest since July 2009, during the first months of recession recovery. The trend for this ratio is down (see the burnt orange line in the chart above). It’s not far from hitting the lowest point during the recession at 0.17.

Now I’d like to reminisce a bit about that point in time. The stock had bottomed at $78/share[1]. It was trading at barely 3x cash and a P/E of 11 but growing 3x that level (32% in the slowest recession quarter but averaging much higher).

So today we are at a similar point in valuation. The cash is at $64/share, shares are priced 5x that amount and the growth is 4x P/E[2]. Although analyst targets are less comical, there is still the sense of extreme despondency when looking at the valuation ratios.

Guidance, Comparables and Macroeconomics

Unlike two years ago there aren’t the same dark clouds on the macro horizon. The company is also not as cautious on its guidance (guiding 63% EPS growth must be a new record for a post-holiday quarter) and there is talk of bubble in valuation for comparable companies. Netflix, Amazon, and ARM have eye-watering valuations relative to growth.

A discount to the S&P 500

And to round out the tragic tale, Apple’s P/E is, once again, at a discount to the S&P 500 P/E (14.7 vs. 16.57 respectively).

Given the new low in valuation contrasted with optimism on behalf of many (including management), on some forums there is discussion about Apple becoming the target for a take-over.

There is some perverse merit to this logic. With $64 in cash, $25/yr in earnings and 75% growth it’s so cheap that if credit were available, it would make a tempting candidate. Private equity could take it private and use the gigantic cash flow to pay off debt (in about four years). In bygone days, this would have been an easy pitch.

Alas, the capital markets may not have liquidity for the size of the market cap Apple holds and I don’t see any competitors able to get the leverage for an acquisition either. Or can they?


  1. In early summer 2009 some analysts put 12 month targets for the stock at $70, so their predictions were within $6/share to today’s book value.
  2. A buyer of shares two years ago would only have to wait two years to have 80% of their investment sitting in retained earnings.  An investor who read the data from Apple and knew that the iPhone existed could not fail but be amazed.
  • Yesterday on another site I read a random comment made in jest that Apple may be hoarding its money to take the company private. My initial reaction was amusement but perhaps we should reconsider this as an option brewing at Apple as a means of eliminating the pesky Wall Street mindless badgering and protecting it from take over moves.

    • pendolino

      an interesting point but slightly underestimates what it would take to do this as i suspect the would have to pay a decent premium to the market price.

      that said, they do throw off more than enough cash to service debt so its definitely to be considered.

  • Accent-Sweden That's a really interesting point. Could someone (Horace maybe?) explain why the company might want to go private or at least buy back a huge amount of its own shares? How would this help it?

    • asymco

      The question is really "whom" would it help. If an asset is subject to arbitrary manipulation and if employees and management and owners are depending on some rewards from the company based on the asset price, then removing the speculation and substituting profit sharing could be a net value creating step.

      In practice, going public was a great way to create liquidity for stakeholders, but it's not always the best way to compensate the risks people take.

      • The benefits to Apple of being publicly traded as opposed to privately held are not very clear to me. The initial stock offering benefited the original stakeholders but that benefit seems irrelevant over time and offers nothing that I'm aware of to the company's current existence. Current employee stock options are no doubt a carrot but, as Horace notes, can be substituted with profit sharing. And Apple has no need of additional share issues to raise capital.

        Many companies may need public ownership and accountable directors as a way of keeping them honest or focused, but as we've seen, this often devolves into shortsighted quarterly profit goals and not long-term objectives or growth. I think most here would agree Apple does not need its public stakeholders to keep it focused. Apple does not work for its shareholders, it works for its customers, to the benefit of both its customers and its shareholders.

        There have definitely been occasions when Apple has had to respond to pressures for public accountability by shareholders, such as on environmental concerns and labor conditions. Whether being publicly traded is required for this or whether public pressure in general would have achieved these arguably reasonable goals, is not completely clear to me but I assume bad publicity is bad whether you are privately held or public traded.

        I clearly understand the benefits to shareholders: increased returns on investment. But how does Apple as a company benefit today by being publicly traded? Is it just the consequences of its first public offering that cannot be altered without a buyout and offers nothing for the current company or is it a real advantage?

      • r00tabega

        It helps keep talent.

        By combining a growing stock with options and stock grants (with a vesting period), the employee is incented to stay even if the work is not as rewarding or the pay is not what (s)he would get elsewhere (obviously large pay increases or far more interesting positions will pull employees away).

        This is magnified up the employee chain, all the way to the C-levels.

    • Hamranhansenhansen

      If Apple didn't have a board of directors, its board of directors would never have been able to fire Steve Jobs. There was talk of taking Apple private in 1997 after Steve Jobs came back.

      Steve Jobs is on record again and again saying salespeople should not run technology companies, because they run them into the ground. By extension, should investors have a say? Day traders?

  • Danthemason

    The achievements of Apple are beyond traditional metrics. The behavior of management has produced super human results. The management has subdued their egos in pursuit of the here- to- for unattainable. And most observers are nervously waiting for the house of cards to come down with each new card added to the structure. These observers do not yet understand that at Apple, there is more to it than money. And management will not let those with money as their only goal reduce this fine construction.

  • The problem in going private is that right now, all is well with the company (and they project out this way for years to come). But right now a lot of executive compensation is tied up as equity. Should Apple use a large amount of their cash cushion to go private, if the cashflow spigot slows considerably for a time (or shuts down entirely) that removes the safety valve they have in place right now.

    I think a large reason Apple's hoarded cash is because they've had near-death experiences before and would prefer to make sure that they never happen again. Cash is king, even if it isn't being invested aggressively.

    I doubt Apple will at this point ever realistically be a candidate for acquisition again like they were so many times in the 80s and 90s. They're simply too big and too rich for anyone to come up with the resources needed to buy up the shares. We'll just see status quo continue for some time and eventually Apple will redeploy some of their cash if/when the management team feels comfortable doing so.

  • While the PEG can be used in a general sense for some guidance, the notion expressed above — "where 1.0 is seen as 'fair value'" — is one of the great canards of the investment business. It is, simply, unpegged.

    • asymco

      Note that I don't use forward growth for G. I am using trailing growth since it's a matter of record not estimates. I fully agree with your point that forward growth is a matter of conjecture.

      I use P/E/tG (or P/E/TTM G) as an arbitrary indicator of a trend.

      I am interested in describing a company's value relative to its historic growth. The historic P/E over historic Growth.

  • Chris

    Could anyone provide valuations for companies which pay dividends vs. those which don't?

  • anon

    Sorry, typo: in your 8th paragraph, you say "training" growth when you mean "trailing." As usual, an excellent, excellent analysis! Keep going…

  • Hap

    Steve said not too long ago, "We want our shareholders to stick around." Presumably a jab at the current 'renting' vs. 'owning' mentality. (See John Bogle's "Enough.")

    I wonder if the average 'little guy' stockholder would feel betrayed by a take-over. Would Steve and Company do that? And how do you think Steve would respond to the sight of siege engines being dragged up to the walls of 1 Infinite Loop?

    I agree with "Danthemason" above: "There is more to it than money."

  • Stefan

    What would the buy-out price hypothetically be?

  • Horace, do you not think Apple would have a poison pill in place to negate this possibility?

    • asymco

      I think this scenario is only theoretical and a thought exercise. As I point out it's too big to swallow. Poison pills, if they exist, are usually self-evident in the form of debt. Apple has none.

      • r00tabega

        As an employee of a company that was the target of a hostile takeover by Oracle, I think I can say that I'm familiar with plenty of different poison pills, and debt is merely the most convenient but dangerous (flirting with liquidity crisis)

        For example, some poison pills in place could trigger stock dilution if any investor owned more than 20% interest (making it impossible to win a proxy war). This is often called a flip-in plan.

        Notably, poison pills don't work if stockholders of both entities happen to decide that the combined company will be more profitable for them in the long run… in our case, Oracle merely had the court over-rule the poison pill.

        Question is, does Apple have any of these defenses in their charter? Would it matter regardless?

      • I was thinking more along the lines whereby Jobs, Oppenheimer, Cook, Mansfield, Schiller,Johnson,Serlet, Forstall, Mansfield and Williams all threaten to leave in the event of a takeover. All very legal, and probable, in my opinion.

  • Let's put an end to this silliness. I'll be happy to wager that Apple does not become a takeover candidate anytime soon. I'll put up real money that they won't be bought out or taken private in the next year. Any takers?

  • Waveney

    Out of curiosity, Horace, what would you see as a realistic figure to get a majority shareholding in the event of a takeover. Personally, I think the hostility that would be generated by such a move would put the MS/Yahoo debacle, into the shade, and would damage both parties in much the same way. Leaving aside all the market figures for Apple, which I agree, do not currently make much sense, I cannot see any institutional investor who might be swayed if the price were big enough, risking their future by being part of such an aggressive move. And it would have to be aggressive to avoid too much of a price hike.
    The more I think about it, the more risky it seems and that is what holds back such a potential move. Apple's business is a one off, a finely balanced mystery, like a Swiss clock and despite all the analytical and hypothetical words that meant to get to the root of their success it is as unfathomable as ever.
    Not withstanding your fine analysis of course.

    • asymco

      There'd have to be a premium to current value of course. I can't speculate. But I want to stress that the point of the headline and conclusion was really to highlight the deep discount of the company today. My point is that it's so cheap that it's vulnerable. Sometimes this vulnerability is due to management failure. Many companies are taken over, management is fired and value is unlocked.

      It's hard to explain the Apple discount today.

  • evelyn

    Amusing thought, however impractical it is. I enjoyed it. The article highlights an undeniable fact that Apple is so ridiculously undervalue that it would be a fantastic bargain as an acquisition target. If this is what it takes for investors to wake up and take notice, then I am all for it. It's refreshing, thanks.

    • dubTX

      I kept thinking of their far too low P/E ratio this weekend and vowed to add a few more shares to my positions this morning (which I did). AAPL continues to be a bargain, as hard as that sometime is to accept.

  • Anthony Aaron

    It would be a death knell not only for Apple, but for any company run with daring and creativity and incredibly focused vision on the future. Sure, it would probably make a fortune for the looters — but American business, which is already sadly in need of rejuvenation, would lose its most amazing beacon.

  • JonathanU

    Horace – I've been following the conversation on the AFB and now on regarding AAPL as a potential takeover target.

    As you know, given my experience working within private equity, I can safely say without a shadow of a doubt that Apple could never be taken private in a PE transaction. The following link is a link to the largest PE deals ever done. You'll note the dates for a number of these deals were in 2006/2007, which also happened to be the frothiest peak of the PE bubble – since then, the PE market has been pretty much moribund at the larger end of the spectrum and only just about coming back to life in the middle market:

    Running through the numbers of a transaction involving AAPL, you have a mkt cap of $307bn minus the $59bn of cash on the balance sheet giving a resultant enterprise value of $248bn. Now estimating FY2011 EBITDA for the business at say $30bn (I've literally plucked this number from the thin air, you'll no doubt have a better hold on the numbers than I do). That would give a forward EV/EBITDA multiple of 8.3x. So lets say for the sake of the argument that the deal is a 50:50 debt/equity deal. The combined consortium of PE investors would need to stump up $124bn in equity whilst borrowing a further $124bn in some combination of senior and mezzanine financing from the global investment banking industry.

    Dealing with the equity side, if you take Blackstone as an example of probably one of the largest PE funds on the planet, they currently have FuM of about $24.3bn, and not all of that will be dry powder. Lets assume that they can only allocate 25% of the fund to any one investment (most funds can allocate more so long as they get approval from their advisory boards), that leaves $6bn that Blackstone could theoretically allocate to this deal. To therefore get to the magic $124bn needed, you'd need approximately 20 funds the same size as Blackstone (which there aren't in existence) to all want to invest in the deal…

    On the debt side, raising $124bn would again be impossible. Never has that much debt been syndicated from one single transaction before. And given the paralysis in the current leverage debt markets, trying to attempt anything like this would be totally impossible.

    It's a fun exercise to think about, but practically speaking would be impossible.

    Keep up the good work on the blog – I especially enjoy these more financially orientated posts.

    • JonathanU

      Similarly running through the numbers I didn't even include a bid premium to the current EV. If you add say a 25% premium to AAPL's current valuation, you have an EV of $310bn.

      • asymco

        So therein lies the tragedy. If the company had value that was locked away due to market inefficiency, it could not be unlocked, ever. Apple employees, management and shareholders will never see the reward that a smaller company with worse performance could achieve.

      • JonathanU

        I guess it all depends on whether you believe in the efficient market hypothesis. At present, we feel that AAPL is undervalued, given we have what the consensus would believe to be bullish forecasts for the company going forward. I am personally of the opinion that if we do see the rates of growth that most of us expect at the AFB (yourself included), then the stock price will materially increase.

        Similarly, I don't subscribe to the argument that there aren't enough pension/hedge/mutual funds out there to keep buying AAPL. The global financial system is tens and tens (if not hundreds) of trillions of dollars deep. The stock market may not be valuing future free cash flow growth of Apple sensibly, but it will do so sooner or later. Market irrationality can only last for so long.

        All this deep discount to growth rates for AAPL implies is that we are blessed with being given another opportunity to keep filling our boots with AAPL shares. These opportunities don't come around too often in investing, so we should be utlimately thankful for being so lucky!

    • asymco

      Thanks for doing this exercise. Even without it it's pretty clear that the number needed is astronomical. I hinted as much in saying that there is not enough liquidity in the market to raise the needed funds.

      But it was meant more as a thought exercise. You get into these paradoxes sometimes where companies are "too big to fail" but do we have here with AAPL something that grows so fast that it's "too rich to value"?

      • The thought of "too rich to value" makes me all warm and fuzzy inside (I'm not being sarcastic – I had a visceral reaction to reading it), but then I caught myself and wondered if wishful thinking is blinding us.

        Or perhaps we are just so constrained by conventional wisdom, even when we have the numbers in front of us, that we just shake our head and convince ourselves we must be dreaming.

      • asymco

        The idea of too rich to value is common in real life. We just call these things priceless.

        But I mean it in the very real and somewhat tragic sense. You may be familiar with very small companies which have great value but due to lack of liquidity are too small to be valued properly. Quite simply, nobody knows about them and can't be bothered to research them.

        With Apple we might be witnessing the logical opposite: something that is so rich, that everybody already has bought into, that there is not enough liquidity in the market to reveal its real value.

        Pricelessness is of no use if you want to sell.

  • I think JonathanU's analysis starts to hint at the real reasons for AAPL's apparent undervaluation — the company's size and value in the stock market have outstripped the ability of bullish investors to keep buying. Both in practice and due to certain regulations, institutional investors tend to limit the proportion of their total assets that they will invest in a single position. I'm sure you've seen the stats, for example, that AAPL is already the top holding of the 300 largest largest hedge funds.

  • Stefan

    Few thoughts:
    1. Everyone is talking about a hostile take over. Even if you could assemble the debt and equity, Jobs and Cook leave and all the buyout investors would bail. This would have to be an internally initiated buy-out.
    2. In theory the board works for the shareholders. if they took $300B, there would lawsuits galore. Try $500b minimum and that would still be cheap.

  • ayedee

    Provocative and fun article. I hope everyone reading this who believes in Horace's underlying premise appreciates the practical implications. Even if AAPL stays stuck in this narrow P/E band, returns to investors are going to be fantastic. Do yourselves a favor and buy as many AAPL LEAPS as you can reasonably afford. Barring another worldwide recession, I doubt there are many opportunities out there available to the average Joe Schmo investor that will provide such high returns for such low risk (please enlighten me if there are!). This opportunity wouldn't be here if AAPL shares were valued the way they should be. As someone who's already fully invested, though, I must admit it is a frustrating state of affairs.

    • tim

      The problem is AAPL LEAPS are already quite rich. Though they offer higher potential gains than the shares, the risk that those options expire worthless make the shares a much better bet to me. As good as Apple is, there are always unknown unknowns.

  • KenC

    Have we ruled out Middle Eastern or Chinese sovereign wealth funds, yet?

    As others have noted, it's a useful mental exercise, not so much to highlight the possibility of a takeover, but the corollary of how damn cheap Apple is right now.

    • JonathanU

      Ken – that was my only thought actually. Some sort of combo of Temasek, GIC, Norwegian SWF along with China Investment Corp and perhaps some of the large pension funds could perhaps get somewhere close. But good luck raising that much debt.

      Not to mention the political uproar that would ensue when Fox News et al got wind of the Chinese coming in and buying one of the US's prime companies…

  • Wow, I really enjoyed reading all these comments. Thanks to everyone who's contributed so far. I'm putting this in in my vote for 'Best discussion' on Asymco yet 🙂 Slightly sad that I wasn't able to contribute, (I know very little about finance), but I have learned a lot.

  • poke

    There's a common myth that Apple is grossly overvalued. I'm not sure how this myth persists or whether it persists where it matters but perhaps it's connected to your earlier post about the Mac gaining market share. Peoples' understanding of how the market for PCs, devices and smart phones has changed is lagging Apple's vision. They haven't yet woken up and realised that Apple is not an aberration, destined for correction, but is rather making all the right moves given newly prevailing market realities. I think a major dent in Android on Verizon due to the iPhone could change this. Android is one of the major things propping up the old narrative.

  • ______

    I think it is yet another way (tongue in cheek) of suggesting that the stock is not valued high enough by the market, that's all.

  • GeorgeP

    I was wondering if investors see Apple like a manufacturing or SW company with great consistent growth (Google, MS, Sony, …) and terrific fundamentals or rather like a movie company (Pixar and Disney) that needs to keep producing megabits every few years. While they had a string of hits and can make money on selling the residuals they are hostage to making another hit.

  • MSFT

    PE cannot do the deal. However, MSFT might just have balance sheet to raise the kind of money. MSFT has about about 45 billion in cash at the end of the last quarter and almost debt free balance sheet. Assumed JonathanU's calculation of raising 124 billion in equity. can a company like MSFT or two raise the kind of money to buy out apple?

    • JonathanU

      Not a chance. Not to mention if MSFT did initiate a hostile takeover, one of the key defenses every investment banker would suggest to Apple's board would be to undertake a reverse takeover and buy out MSFT.

      But again, the numbers involved in either of these scenario's are quite frankly preposterous.

    • 21tiger

      Am I missing something here? Apple share are heading for the $400 mark, and the market cap is $300B.

      Aren't you about $140B short?

  • Steve Webb

    Apple is not a takeover candidate, because the real value of Apple is in the talent. What would Apple be worth if their designers (hardware, software, packaging, etc.) quit? That IS the poison pill! How many Apple employees would stick around after a HOSTILE takeover?

  • dmers

    Maybe another option would be for Apple to buy MSFT and then control the MS Office market. All the poor engineers that MSFT has would be fired and Apple personnel hired to make MS Office the program it should be. They could eliminate the dysfunctional "Ribbons and Tabs", drop Access and go with Filemaker Pro and really begin control of the Business market.

    This would also eliminate a lot of competition in product lines. Apple is really the R&D of the computer industry and MSFT can only make cheap clones of Apple product lines. Dell is going broke trying this approach.

    • TomCF

      MSFT engineers aren't poor in any sense of the word. There is a lot of important knowledge there. There's fluff as well, but MS Office is probably Microsoft's strongest offering. Excel crushes Numbers in a lot of little ways, in ways similar to how the iOS crushes Microsoft's previous mobile offerings. (I haven't played with Win Mobile 7 to make that comparison.)

      Keynote and Powerpoint are probably about equivalent, unless you start needing automation.

      Word has some cruft, but is a VERY strong word processor at its heart.

      And as silly as Visual Basic is, it's fantastic if you need to write a tool incorporating Office. Applescript is a complete mess.

      Windows and its UI, well that's a whole different story…

      • Tom I would suggest they are poor, in the sense they work for Microsoft.

  • Stefan

    Back to the “priceless” discussion, Apple could afford to pay a 5% ($17) dividend going forward. Yield hunters would bid the price up till yield fell to the 3.5% range, or somewhere around $500. Annual dividend hikes would keep the price moving.

  • lb51

    A bit off topic, but I thought the link to the chart could offer insight on stock price dynamics. It's not all inclusive, just an offering of how markets can behave.

    • chandra2

      That is a kickass chart. Thanks ib51.

  • 21tiger

    The reason you would buy back shares if you are quite obviously undervalued is the same reason you would buy Stock in the company if you were Joe Schmoe! It's a brilliant way to 'spend' their cash, if the numbers reveal that AAPL is way undervalued!

    Going private completely might be a great way to keep secrets, and not have to answer to shareholders complaining about things like… dividends… but I doubt that would ever happen.

    After all, the only reason you go public in the first place is to finance the companies operations… In a few short years, Apple could have a Treasury of about $100B… you think they really need the cash?

    In many ways, 'buying back all the remaining stock' is the dream of every company that goes public in the first place. You go public to finance huge expansion.. Apple's done it, and has more money than, quite literally, they know what to do with.

  • Jeff Gerritsen

    Carlos Slim, Warren Buffet, and Bill Gates… want to grow your wealth a little more guys? Investments like this don't come around very often. I think the 3 together can come up with $124 billion…

  • realitybytes

    This is just an exercise in futility. No one, planet Earth could pull this off and interestingly enough, there is no reason to even try. There is no management team that's better, there is no overriding reason to think that anyone could assemble a team that could do better. Microsoft? Who's kidding who, they are living on the trailing revenue of their past, they have produced nothing new in the last 5 years that has captured any market, they fail more than they succeed (it's their CEO, he's overmatched and under equipped to be the sort that inspires and nurtures his people to be the best at anything).
    Who's left? Who has the 5-700B it would take? And why would they bother.

    • Lee Penick

      In response to "realitybytes":

      Why would they bother…because it's a tremendous money making opportunity.

      If I owned the company now, for somewhere around $300 billion I would own the right to roughly $20 billion per year in earnings. (it's hard to settle on an earnings number since it changes rapidly, use trailing or forward looking as you like)

      That's 6.7% return now. Not quite twice a 10 year treasury bond.

      But with apple, the yield doesn't stop at 6.7% and stay that way for 10 years. Even if you want to go conservative and drop 70% and 50% growth rates, look at what five years of 20% will do, then 5 more at only 10%.

      Yearly earnings would be about $80 billion.

      The $300 billion investment would be yielding 26.7% a year, and probably still growing.
      If an investor believes Apple has advantages that are sustainable, and this blog and the comments talk about quite a few, there are great advantages to owning the entire company….or even a few shares.

      valued another way, with $20 EPS and a p/e of 20, the value is $400.

      With only 20% growth, EPS the following year is $24, and with the same p/e the value is $480.

      the next year, EPS of $28.80 and $576.

      It would be outstanding to see several future years of 50-70% growth, but 20% works just fine.

      Why wouldn't someone 'bother' to acquire an interest in Apple? Small or large?

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