Motives and Possibilities for a Big Apple Acquisition

The tech industry has a new favorite sport: guessing who Apple will buy with its $50 billion-plus cash hoard. Since October 18, when Steve Jobs mentioned the company was keeping its powder dry for possible deals, speculation over potential Apple acquisitions has run rampant and even includes household names like Sony and Disney.

Much of this current speculation is a result of the size of Apple’s cash hoard, but we shouldn’t forget Apple’s historically conservative behavior regarding acquisitions. In fact, when you examine the company’s past, two facts should be kept in mind:

  1. Apple hasn’t historically pursued  blockbuster acquisitions (it hasn’t, to my knowledge, ever done a billion-dollar deal)
  2. Apple doesn’t generally buy hardware manufacturers (the company buys ingredients, but generally not products. This is probably due to the fact it is so good at building them itself).

While Apple will likely continue to avoid buying hardware companies (unless it gets some key intellectual property or patents), I do think Jobs effectively put a blockbuster deal on the table with his words on October 18. So, for the purposes of this analysis, I too will throw a few ideas out.

Below are Apple’s last seven acquisitions and a summary of what the company gained from from each deal:

chart1

The chart above indicates the main factors motivating Apple during its acquisitions in recent years:

Control. Apple likes to control its own destiny, which means controlling more links in the product roadmap. This desire for control drove Apple to acquire two semiconductor firms in the past few years, giving the company more control over mobile processor design.

Creatively monetizing market position. Given Apple’s strength in markets like apps and smartphones, adding additional engines for monetization to capitalize on existing market positions (as Quattro Wireless does by enabling direct participation in mobile advertising) is a key justification for Apple acquisitions.

Product differentiation/creation. At it’s core, Apple is a product company. Most of its acquisitions (maps/geo, chips, music streaming, etc.) are about creating highly differentiated products and services.

Google. Much of what Apple has done in recent acquisitions was aimed at strengthening its position against the other dominant mobile and technology company: Google. This is especially pertinent when considering the purchases of Quattro Wireless (for mobile advertising and as a direct reaction to Google’s acquisition of AdMob); Lala.com (possibly motivated by the impending launch of Google music services); and Siri (which could help Apple launch its own mobile search service).

Now let’s address some of the recent rumors by examining which of the four motivations each potential new deal could achieve:

apple acquisition matrix

While this list is by no means exhaustive, it does examine some interesting possibilities. And while I think Apple could make a big move in the coming six – 12 months, I don’t believe:

  • It will use the vast majority of its war chest (which would be required for Facebook and AT&T)
  • It wants to buy mature businesses (Sony)
  • It wants to shoot itself in the foot by buying a competitor to an important potential partner (buying AT&T would piss off the other big-three U.S. mobile carriers)

My personal belief is Twitter and Spotify are the most intriguing possibilities of those listed. Twitter would be highly disruptive; Spotify would be a leap forward in a category where Apple already has a giant footprint (music). I also believe there are some smaller acquisitions, such as TiVo (mostly because of the IP it could give Apple for the living room), that could make sense.

Of course, at the end of the day, predicting what Apple will do is nearly impossible, so chances are I’m wrong. But it sure is fun to join in the tech industry’s current favorite sport and try.

Question of the week

Which companies make the most sense as future Apple acquisitions?
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Michael Wolf

Chief Analyst NextMarket Insights

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