Apple is Overpaying for Beats -- But That Isn't the Problem

The S&P 500 and the narrower Dow Jones Industrial Average (DJINDICES: ^DJI  )  were down 0.19% and 0.33%, respectively, at 10:18 a.m. EDT. In company-specific news, Apple (NASDAQ: AAPL  ) is reportedly preparing to announce its acquisition of high-end headphones maker and music streamer Beats Electronics -- at a lower price than was originally touted.

When the Financial Times reported nearly three weeks ago that Apple would acquire Beats Electronics for $3.2 billion, I wrote that the target didn't look like an obvious fit and that the price seemed elevated. (I certainly wasn't alone in making that observation -- both the rationale for the deal and its price have proved controversial.)

Source: Wikimedia.

It now appears that the deal under consideration may be lower than the figure mentioned by the FT -- but not by much, if we're to believe an article posted yesterday evening by the New York Post. (I don't usually get my financial news from the Post, but this story is making headlines this morning.)

According to the article, Apple is preparing to announce the acquisition of Beats Electronics this week at a price of $3 billion. Let me remind you of the few elements we have to assess the acquisition price (as a private company, Beats has neither a publicly traded stock nor an obligation to publicly disclose its financials):

 

Beats Electronics revenue*

$3 billion reported acquisition price as a multiple of revenue

2013

$1.3 billion

~ 2.3 times

2012

$1.0 billion

~ 3.0 times

*Estimated. Source: Fast Company, Mergers & Acquisitions.

At 2.3 times last year's estimated revenue, the deal doesn't look outrageous, particularly as Beats appears to be growing at a healthy rate. However, we have some other valuation benchmarks. Taiwanese mobile devices manufacturer HTC invested in Beats Electronics in 2011 at a valuation of roughly $600 million, then sold its remaining 24.8% stake at a valuation of $1.07 billion last year.

Did Beats' intrinsic value nearly triple since last year after having only doubled over the previous two years? The two previous valuations don't look consistent with today's $3 billion figure. Either HTC got bamboozled last year -- despite earning a very decent return on its investment -- or Apple is getting ready to overpay for Beats (or some combination of the two).

My concern with the Beats deal is not so much that it suggests a lack of financial discipline -- overpaying a bit on a deal this size is financially inconsequential for a company of Apple's size -- but rather a lack of strategic vision. The fact that the original $3.2 billion reported price is the same amount that Apple rival Google is paying for smart appliances maker Nest (at what is likely an inflated valuation, too, incidentally) highlights a huge missed opportunity for Apple.

Nest was a much better fit for Apple (it was even founded by Apple alumni), as well as a wedge into an enormous nascent market -- the Internet of Things -- especially if Apple is getting ready to announce a smart home software platform at next week's Worldwide Developers Conference.

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  • Report this Comment On May 28, 2014, at 10:30 AM, fool99 wrote:

    Can anyone explain why Apple reporters state that Apple is overpaying for Beats at 2.3-2.5 times revenue, but Google was BRILLIANT at outbidding Apple for Nest at 10 times revenue? Now they are saying Apple is releasing Home service to compete with Nest? These products are years in development. Apple filed patents on key parts of this home service technology over 5 years ago. Nest is simply a thermostat and the Smoke alarm was taken off the market due to issues? Reporters to compare both and see who the real fool is... Of course, Google was also brilliant when the bought Motorola (wait, that already was a failure and they sold it to Lenovo).

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