When Steve Jobs passed away in 2011, he owned more shares of Disney (DIS 0.42%) than he did of Apple (AAPL -1.04%). He had gained that stake through his sale of Pixar to Disney in 2006. Since then, many people have dreamed of a merger between the two iconic American companies.

Disney CEO Bob Iger floated that idea in his 2019 memoir and even claimed in a 2021 interview that Jobs would have supported a merger if he had lived. Last November, an unnamed insider claimed Iger could sell Disney to Apple, but Iger denied those rumors. Needham analyst Laura Martin recently revived that idea in a research paper that claimed an acquisition of Disney could easily boost Apple's valuation by 15% to 25%.

Apple is one of the few companies in the world with the finances to pull off that massive deal, but would it actually make any sense? Let's review three reasons Apple might buy Disney and three reasons it would be a terrible idea.

Apple's flagship store in Manhattan.

Image source: Getty Images.

Three reasons Apple could buy Disney

Apple could buy Disney for three reasons: It would expand its services segment, reduce its dependence on the iPhone, and potentially generate synergies in terms of marketing, bundling strategies, and the collection of customer data.

Apple ended its latest quarter with 935 million paid subscriptions across all its services, which include Apple TV+, Apple Music, Apple Arcade, Apple News+, Apple Fitness+, and iCloud+. It bundles those services in its Apple One subscription.

Acquiring Disney would strengthen that ecosystem by adding Disney's 235 million streaming subscribers (162 million on Disney+, 25 million on ESPN+, and 48 million on Hulu) to Apple TV+. Additionally, Apple Music would gain more songs, Apple News+ could be tightly integrated into ABC News, and Apple Arcade could potentially get more Disney, Marvel, and Star Wars games.

That merger might solve Disney's biggest problem: the widening losses in its direct-to-consumer streaming division. Merging its streaming ecosystem with Apple's would reduce its own content production, infrastructure, and marketing costs.

Last quarter, Apple generated 18% of its revenue from its services segment, which houses its subscriptions, App Store sales, and other services. But it still generated 56% of its revenue from the iPhone, which will likely face diminishing returns with longer upgrade cycles. That percentage would drop to 47% if we combined Apple and Disney's latest quarterly numbers.

As for the bundling opportunities, Apple could sell Disney-themed products; promote its products in Disney's movies, TV shows, and theme parks; and even provide its Apple One subscribers with special discounts for Disney's theme parks and resorts. It would also gain access to Disney's goldmine of customer data, which could guide Apple's development of future hardware, software, and subscription-based products.

Three reasons it's a terrible idea

Those possibilities are tantalizing, but the acquisition would be a bad idea for three reasons: the hefty price tag, the acquisition indigestion, and the mismatched operating margins.

Disney currently has an enterprise value of about $210 billion. An acquisition premium of 30% would boost the value of that deal to more than $270 billion. Apple ended its latest quarter with $165 billion in cash, cash equivalents, and marketable securities, so it would likely need to take on more debt or cover the rest of the deal in stock.

That also means Apple would likely need to pause its big buybacks. It has already reduced its outstanding shares by 40% over the past decade, and suspending those shareholder-friendly buybacks in favor of a massive media acquisition could be poorly received. Apple could also purchase several smaller media companies -- including Paramount, which has an enterprise value of $29 billion, or Warner Bros. Discovery, valued at $78 billion -- to expand its services segment without inheriting Disney's theme parks and resorts.

Acquiring Disney would also complicate Apple's simpler business model of selling premium hardware devices and locking in its customers with high-margin subscriptions. A comparison of Disney and Apple's gross and operating margins over the past five years, which clearly reflect the impact of COVID-19 and Disney's loss-leading expansion into the streaming market, indicates that acquisition could significantly reduce Apple's margins:

DIS Operating Margin (TTM) Chart

Data source: YCharts. TTM = trailing 12 months.

Lastly, Apple's takeover of Disney would likely face a lot of opposition from antitrust regulators. The two companies operate in different sectors. However, the combination could give them unfair competitive advantages against Apple's hardware and software competitors and Disney's competitors in the media and theme park markets. Apple could get so distracted by those regulatory challenges that it might impact the development of its new products and services.

It's doubtful this mega-deal will ever happen

A merger between Apple and Disney is a fascinating idea, but it doesn't seem realistic. For now, it makes more sense for Apple to expand its ecosystem with mixed-reality headsets and software for connected cars than it does to acquire the world's largest media and theme park company. It would be smart for Apple to sign some content and marketing deals with Disney, but it's irrational for the tech giant to swallow up the whole company.