Apple Needs To Do More M&A – Forbes

Tim Cook, chief executive officer of Apple Inc., right, smiles during a demonstration of the new MacBook Pro laptop computer during an event at the company’s headquarters in Cupertino, California, U.S., on Thursday, Oct. 27, 2016. Apple Inc. introduced the first overhaul of its MacBook Pro laptop in more than four years, demonstrating dedication to a product that represents a small percentage of revenue. Photographer: David Paul Morris/Bloomberg

I have been a staunch critic of Apple’s capital return plan since it started in 2012.

I think it signals to Wall Street that Apple is out of growth ideas, which is preposterous even though it’s now a $700 billion market cap company.

According to Horace Dediu, Apple has now done about $150 billion in stock buybacks and about $50 billion in dividends. It’s also taken on almost $100 billion in debt. The buybacks do reduce the share count, which increases the stock price. Apple’s been about to reduce its share count about 18% to 525 million. Technically that should boost the stock by about 22% (all things being equal). That means that Apple’s $131 stock price today – in theory – would be trading around $102/share had they not done the buybacks.

Yet, the dividends make no sense. They’re as helpful as Ballmer’s one-time special dividend was to Microsoft’s stock after the dot com bust. I think I remember some Wall Street analysts defending the dividend component of the Apple capital return plan in 2012 because it would “bring in a whole new class of investors to the stock.” Congrats on attracting a few more widows and orphans retail investors.

What brings in (big institutional) investors to a stock is when they perceive that it will go up in value in the short term (see Apple’s stock 10 years ago). Money shoveled out the door for dividends creates no value.

And don’t forget the cheap $100 billion of debt Apple has to be paid back.

The whole capital return program has been a lot of work on Apple’s part to basically do a little bit of stock buyback.

And yet what do the Apple defenders say about this capital return plan compared to potentially using their cash hoard to do M&A instead? They say: it’s all about focus.

There are different views on how Apple should do M&A as an alternative path to capital return. Andrew Ross Sorkin advocated a laundry list of deals Apple should do. Several of these names look dated now (Nuance and Research In Motion).

I advocate a different approach. Apple has to be selective. But that doesn’t mean they shouldn’t take big swings.

I argued that Apple should have bought Facebook for $100 billion in 2011 when they were worth $50 billion privately. I’ve also made the case for Apple buying Instagram, Twitter, and Yahoo over the years.

Here’s a piece I wrote in 2014 called “The Folly of Stand Pat Apple.” I implied that Apple should’ve bought Tesla and asked if Zuckerberg or Musk would do a capital return plan like Cook’s if they ran Apple. (Clearly they wouldn’t.)

That article reads well 3 years later, although I can understand why Apple preferred to go their own path to self-driving cars (which they assuredly have to do) rather than buy someone else (even Musk) with the baggage that brings.

Apple also clearly should have bought Netflix at different points in time (so should any number of buyers before they grew too big). If Apple is going to have an Apple Music subscription service to replace the dying iTunes per per download biz, why wouldn’t they also have an Apple Video sub service? Of course, they will (but way later than they should have). And if they were playing with footsie with buying HBO before AT&T took action, don’t try to tell me it wouldn’t have been equally or more logical to buy Netflix.

Here was John Gruber’s 2014 response to my Folly of Stand Pat Apple piece (in which he refers to me as “Action Jackson”… which he meant as ‘action for the sake of action’):

This is the worst sort of advice, suggesting a complete ignorance of everything Apple stands for. (Jay Yarow loves it, of course.) Just buy something. Spend, spend, spend. Acquire. Buy all the spaghetti, throw it against the wall, see what sticks. Wrong. Apple’s model is about focus. Apple wasn’t joking about “a thousand no’s for every yes” — that’s really how they think, what they believe. That’s the DNA.


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