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.

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