By John Gruber
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I cannot believe that Bloomberg published this story by Alex Webb and Alex Sherman, “Apple Struggles to Make Big Deals, Hampering Strategy Shifts”. The entire story consists of quotes from investment bankers arguing that Apple should hire investment bankers to make more large acquisitions. Really, that’s it.
But Apple has struggled for years to pull off bigger deals because of a series of quirks: an aversion to risk, reluctance to work with external advisers like investment banks and inexperience in closing and integrating large takeovers, said people who have worked on acquisitions with the company. They asked not to be identified speaking about private merger and acquisition deliberations.
The only proof offered that Apple has struggled in any way to make any acquisitions is that they haven’t made more acquisitions. There’s no mention of any companies that Apple pursued but failed to acquire. Not one.
Apple’s biggest deal in its 41-year history was the $3 billion purchase Beats Electronics in 2014, followed by the $400 million acquisition of NeXT Computer in 1996. In Facebook Inc.’s 13 years, it has made three acquisitions of at least $1 billion, including its $22 billion WhatsApp purchase. Google, founded in 1998, has done four such deals, while Microsoft Corp. has completed at least 10, according to data compiled by Bloomberg.
The comparison in the above paragraph completely rests on the assumption that more and bigger acquisitions are a good thing in and of themselves. No mention is made as to whether these acquisitions were actually good for the companies. (Apple’s $400 million NeXT acquisition worked out OK.)
Instead of closing big deals, Cook has so far focused on growing Apple’s services businesses, including Apple Music, the App Store and iCloud. That’s beginning to work, with the company recently forecasting that annual revenue from those operations will top $50 billion by 2021.
But even here, some analysts and investors argue for a big acquisition, especially in online video streaming. Apple has started distributing videos through the Music service, and pooling other providers’ video in its mobile TV app, but it has no service akin to Netflix or Amazon.com Inc.’s Prime Video.
Apple can’t buy Prime, but they could buy Netflix. But Netflix has a market cap of just over $60 billion, and Apple has a service “akin” to Netflix called Apple Music. Netflix has over 90 million subscribers. Apple Music hit 20 million paying subscribers in December. At the Code conference this week, Eddy Cue claimed Apple Music hit 20 million paying subscribers faster than any other subscription service he’s aware of. And at this point they’re only just preparing to scratch the surface of including original video content.1
Apple would probably have to offer at least $75 billion to buy Netflix. At least. It would cost a fraction of that to turn Apple Music into a serious video service.
On Friday, Sanford C. Bernstein analyst Toni Sacconaghi said Apple needs at least one big acquisition in online video.
No they don’t. All they need to do is negotiate with studios and TV networks to get movies and TV shows currently in the iTunes Store (as purchases) licensed for Netflix-style “pay $10 a month and watch what you want” streaming.
To reach its $50 billion target, the company must find an extra $13 billion in services revenue over the next four years — beyond what it can generate itself. Netflix Inc. ended 2016 with sales of less than $9 billion, so even buying that business may not be enough, the analyst said.
Even a $75 billion purchase of Netflix may not be enough. Who said that with a straight face? These fuckers wouldn’t be satisfied unless Apple drunkenly spent every goddamn penny of their cash.
“They’re going to have to pursue something bigger than a Beats-like acquisition,” said Erick Maronak, chief investment officer at Victory Capital Management, which holds Apple stock among its $55 billion under management.
They might, but they do not “have to”. What exactly is the result going to be if they don’t? (I am reminded of Trip “Claim” Chowdhry’s declaration in March 2014 that Apple would “disappear” if they didn’t “come up with an iWatch” within 60 days. Seriously, he said that.)
When AT&T Inc. agreed to purchase Time Warner Inc. for $85 billion in October, the telecom company was concerned Apple might make a competing bid, people familiar with AT&T’s thinking said at the time. Apple had held tentative talks about a year earlier, but when the AT&T deal emerged, a person familiar with the technology giant’s thinking said it wouldn’t be able to pull together a competing proposal quickly enough.
Translation: If only Apple had hired the investment bankers who fed this story to Bloomberg they could have bought Time Warner.
Apple’s deals team is composed of about a dozen people under former Goldman Sachs banker Adrian Perica, and most acquisitions take place at the behest of the company’s engineers. Product managers usually meet every month with Perica’s team members to identify targets with attractive technology or talented engineers, according to a person familiar with the process.
Microsoft’s deals team is not significantly bigger, and it still hired investment bank Morgan Stanley for its $26 billion acquisition of LinkedIn last year, beating rival bidders including Salesforce.com Inc. and Facebook.
Translation: Microsoft has its own in-house team but they still hired a big investment bank, so why can’t Apple let these banks get their fair share of Apple’s cash?
Apple often refuses to work with investment bankers appointed by the seller, preferring to deal directly with company management, according to people who have been involved in such negotiations. Apple also dictates terms and tells targets to take it or leave it, betting that the promise of product development support later and the chance of appearing in future iPhones are alluring enough, the people said.
That was the case when Apple acquired Metaio GmbH in 2015. Bankers appointed by the augmented-reality firm to negotiate weren’t allowed in the room, and while Metaio executives felt the offer was low, Apple’s vision for the technology convinced them to sell, according to a person familiar with the discussions.
This anecdote really strengthens the case that Apple is doing itself a disservice by not hiring outside investment banks, and that the company suffers from “inexperience in closing”. Not.
Apple’s current M&A strategy works well for acquiring startups developing new technology that can be added to existing Apple products. It bought 15 to 20 companies per year over the last four years. But buying larger companies presents a different challenge, particularly if there are rival bids. Bankers often diffuse tension between bidders and targets, but Apple’s approach can make that process difficult. […]
For Apple’s acquisition of Beats, neither party used an investment bank. Apple struggled to integrate the team, and when the initial Apple Music offering emerged from the combination, it got lukewarm reviews. Later versions of the service improved. However, Apple’s lack of a successful track record integrating big acquisitions puts off sellers, according to a person who has negotiated with Apple’s deals team.
Yes, I’m sure a large team of investment bankers would have helped “integrate” Beats within Apple, and the bankers would have made Apple Music — which, again, has over 20 million paying subscribers and is growing fast — a better product at launch.
Apple’s Beats acquisition suggests the opposite of this article’s central thesis: Apple is better off not working with investment bankers even for a $3 billion deal.
Now that they’re getting into original video content, it does make me wonder whether “Apple Music” was a shortsighted name for the service. Then again, they built a nice business selling movies though a service called the iTunes Music Store. ↩︎