Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Apple: Does This "10-Figure Deal" Make Sense?

U.S. stocks finished slightly lower on Thursday, with the benchmark S&P 500 down 0.1%. Meanwhile, the narrower Dow Jones Industrial Average (DJINDICES: ^DJI  ) rose 0.2%, while the technology-heavy Nasdaq Composite Index (NASDAQINDEX: ^IXIC  ) fell 0.4%. One of the technology stocks that weighed on the Nasdaq today was the world's most valuable company, Apple (NASDAQ: AAPL  ) , which was down 0.7%. Furthermore, the stock is not reacting well in the after-hours session to a report in the Financial Times that the company could be about to complete the largest acquisition in its corporate history, that of Beats Electronics, in a deal valued at $3.2 billion.

Source: Wikimedia.

Perhaps Apple followers should have seen this coming. After all, in February, CEO Tim Cook told the Wall Street Journal:

We've looked at big companies. We have no problem spending 10 figures for the right company, for the right fit that's in the best interest of Apple in the long term. None. Zero.

At a reported price of $3.2 billion, the acquisition of Beats Electronics would be just such a 10-figure deal. Of course, what matters is not so much the absolute dollar price, but the value Apple would receive for that price. One thing appears certain: For a company that prides itself on being a disciplined acquirer, Apple is paying up in this situation. Consider, for example, that only last September, private equity firm Carlyle paid $500 million for just less than 50% of Beats Electronics (i.e., at a valuation of just more than $1 billion). Are we to believe that the value of Beats Electronics has tripled in less than nine months? (This doesn't account for the control premium, but the point stands, I think.)

During Apple's fiscal second-quarter earnings call, Tim Cook spoke at some length about Apple's approach to acquisitions, in a manner that balanced an admission of Apple's current appetite with a confirmation of its historical discipline. Mr. Cook stated: "From an acquisition point of view, we have done 24 in 18 months. That shows that we're on the prowl, I suppose you could say." Then he launched into more detail in answering an analyst's question:

We look for companies that have great people and great technology and that fit culturally, and we don't have a rule that says we can't spend a lot or whatever, [we will] spend what we think is a fair price. What's important to us is that strategically it makes sense and that it winds up adding value to our shareholders over the long haul. We are not in a race to spend the most or acquire the most. We're in a race to make the world's best products, that really enrich people's lives. And so to the tune that acquisitions can help us do that and they've done that and continue to do that, then we will acquire. And so you can bet that you will continue to see acquisitions and some of which we'll try to keep quiet and some of which seems to be impossible to keep quiet.

Does Beats Electronics meet those criteria? It's not a brand that I would have assimilated with Apple's -- and it did not figure in Wired's list of 10 companies Apple could acquire, but Jawbone was --  but, then again, I'm no expert in premium headphones. According to the FT, Beats founders Dr Dre and music producer Jimmy Iovine were motivated to start the company in response to the poor-quality headphones bundled with the iPod and the iPhone. Beats Electronics has achieved a commanding market position in premium headphones, but I wonder if Apple is not more interested in its streaming music unit?

Either way, the hefty price tag suggests that, although Mr. Cook is adamant that Apple is not "in a race to spend the most or acquire the most," it does not want to appear to be lagging in the race for cool products. Coincidentally, $3.2 billion is the same price Apple rival Google is paying for smart thermostat manufacturer Nest Labs this year, while Facebook announced in March that it is spending $2 billion to acquire virtual reality headset maker Oculus.

Behind Apple's deal: The biggest thing to come out of Silicon Valley in years
If you thought the iPod, the iPhone, and the iPad were amazing, just wait until you see this. One hundred of Apple's top engineers are busy building one in a secret lab. And an ABI Research report predicts 485 million of them could be sold during the next decade. But you can invest in it right now... for just a fraction of the price of AAPL stock. Click here to get the full story in this eye-opening new report.

Read/Post Comments (0) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2950420, ~/Articles/ArticleHandler.aspx, 8/29/2015 3:00:27 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Alex Dumortier

Alex Dumortier covers daily market activity from a contrarian, value-oriented perspective. He has been writing for the Motley Fool since 2006.

Today's Market

updated 17 hours ago Sponsored by:
DOW 16,643.01 -11.76 -0.07%
S&P 500 1,988.87 1.21 0.06%
NASD 4,828.33 15.62 0.32%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/28/2015 4:55 PM
^DJI $16643.01 Down -11.76 -0.07%
^IXIC $4828.33 Up +15.62 +0.32%
NASDAQ Composite… CAPS Rating: No stars
AAPL $113.29 Up +0.37 +0.33%
Apple CAPS Rating: ****