I've been covering Apple (NASDAQ:AAPL) regularly for quite a few years now, so I know how this goes. The Mac maker's large and growing cash hoard is a source of endless speculation about what Apple should or shouldn't buy. The latest instance is Business Insider's transportation editor Matt DeBord, who believes that Apple should scoop up Uber.
It's basically a given that Apple is exploring transportation, electric cars, and mobility. There's been way too much hiring activity for Apple not to be looking into these areas. But just in case there was any question about it, the recent $1 billion investment in Chinese ride-hailing service Didi Chuxing should put those doubts to rest.
DeBord believes that acquiring Uber would allow Apple to jump to the head of the pack, since Uber is the market leader in many ride-hailing markets. In addition, it could help prevent a future potential downround for Uber, where it raises capital at a lower valuation than the prior round. That could help "stabilize" the current status of unicorn valuations, too, says DeBord.
With respect, I must disagree. Here's why.
The price is not right
First and foremost, Uber is insanely expensive. Just last week, the company raised $3.5 billion in fresh cash from Saudi Arabia's Public Investment Fund. The deal valued the ride-hailing start-up at a massive $62.5 billion, unchanged sequentially from a $2.1 billion venture capital funding round from December.
Adding a take-out premium will push that figure much higher -- at least $80 billion, by DeBord's estimation. He rightly points out that much of Apple's cash is locked overseas and would be subject to hefty repatriation taxes if brought home to fund an acquisition. That would add a cool 35% to the total bill, but DeBord suggests that Apple should fund the deal with stock.
The challenge is that with Apple shares trading in the neighborhood of $100, that would require issuing 800 million fresh shares, representing nearly 15% dilution compared to the current 5.5 billion shares outstanding. Issuing 800 million shares would also eliminate virtually all of the accretive benefits of Apple's share repurchase program over the past four years. Specifically, Apple has retired nearly 1.1 billion shares of stock since the capital return program was initiated in 2012, leading to significant earnings accretion over time. Investors won't want to give most of that back.
Besides, $80 billion would be over 25 times greater than Apple's largest acquisition to date (Beats for $3 billion), which itself was six times larger than the previously largest acquisition ever. The vast majority of Apple acquisitions are under $500 million, although CEO Tim Cook has recently suggested that Apple's acquisitions may go higher as it does not want to be limited by price if the deal makes sense.
On top of all of this, I tend to believe that Uber is grossly overvalued to begin with. Leaked documents from earlier this year suggest that the company generated around $660 million in net revenue in the first half of 2015, leading to nearly $1 billion in net losses.
The unicorn problem is not Apple's problem
Another idea is that Apple could "save" the unicorns in Silicon Valley right now by stepping in with a blockbuster acquisition. An Uber downround could put many private start-up valuations at risk.
Not only is the trend of private valuations not Apple's problem, but a decline in start-up valuations would actually benefit the company. Apple acquires a company every three to four weeks, and often only cares for technology and talent. The company generally has no interest in buying revenue streams, so declining valuations would reduce the price tag for many potential acquisitions.
Ethics and regulations
Uber also has a reputation for being a somewhat unethical company, most recently exemplified by its leasing program, Xchange. On the other hand, Apple is generally a very ethical company that genuinely wants to help the greater good. That's an obvious culture clash.
Time and time again, Uber has shown an active disdain for essentially all forms of regulation that could hinder its growth, even common-sense regulations that are intended for consumer safety. The company, along with rival Lyft, just recently voluntarily pulled out of Austin, Texas, because it lost a regulatory fight over fingerprint-based background checks for drivers. Uber has been sued in countless cities and countries around the world for operating illegally.
Apple would never operate like this, actively defying laws and regulations put in place for consumer protection. Considering its massive global business and brand, Apple adheres to all relevant laws and regulations in the markets that it participates in and the regions where it operates. Another clash of values.
As a longtime shareholder, I'd be severely disappointed if Apple even considered buying Uber.