A Tumblr blog called “Things Apple Is Worth More Than” details, not surprisingly, an astonishing list: All of the gold at the New York Federal Reserve; the world’s entire supply of illegal drugs; the franchise value of “Star Wars”/“Star Trek”/Harry Potter/Stephen King/“Twilight” combined; the entire U.S. aircraft carrier fleet; all 32 euro-zone banks.
All of which is to say, Apple is fantastically valuable. In fact, it sports the biggest market cap of any company in the world. This enormous worth comes from two sources: Its $100 billion cash hoard and its highly valued stock.
Last week, we found out what Apple is going to do with some of that cash: It is going to pay a dividend and buy back stock. But that won’t make much of a difference. Apple’s revenue and profit are growing so quickly that this $2.65 per quarter (about 1.77 percent) dividend will barely dent its cash pile. (Apple’s stock is even more valuable.)
The upcoming $100 billion Facebook IPO made me wonder whether Apple needs to get more creative about some of the new competition coming along. No, I am not suggesting it should buy Facebook. (Mark Zuckerberg’s path will not likely run through Cupertino.)
But the dividend/stock buyback started me thinking about all the other things Apple could do. That huge pile of dough and rapidly appreciating currency (AAPL stock) is a powerful combination. It opens up an incredible range of options.
My preference? Use some of that money to make strategic acquisitions that will shore up the few weaknesses Apple has. The preemptive strike could also prevent anyone else from making a move that damages Apple’s position in its chief markets.
Before we proceed, a caveat: I find mergers and acquisitions to be wildly overrated (IPOs as well). Most companies choose poorly; they end up unwinding these deals at great cost eventually. The AOL Time Warner marriage of 2000 may be the poster child of bad mergers. Outside of big resource mergers in oil or minerals, major mergers rarely work out well. A few distressed bank deals worked out — J.P. Morgan Chase’s purchases of Bear Stearns and Washington Mutual, as well as Wells Fargo’s grab of Wachovia. (Most of the banking-sector mergers of the past decades have been disasters.) Companies pay huge iBank fees to conglomerize, and they pay even bigger fees to de-conglomerize. So no, I am not a fan of most of these big deals.
There are exceptions. A handful of firms have made strategic acquisitions into an art form. In the 1980s and ’90s, Cisco Systems was the best tech firm at this; GE also made excellent industrial strategic acquisitions. Oracle has been making larger acquisitions that added to earnings per share over the years (BEA, PeopleSoft, Siebel Systems, Hyperion and SunMicro). Consider Microsoft’s strategic investment into Facebook — they bought a 1.6 percent stake for $240 million in 2007, effectively shutting out Google from cutting a deal.
One acquisition stands out to me as a model for what Apple could do: Google’s all-stock acquisition of YouTube for $1.65 billion in 2006.