Guessing what Apple (NASDAQ:AAPL) will do with its $117 billion war chest has become a favorite game among not only those on Wall Street, but also the legion of sites devoted to Apple coverage.
There's good reason for this: $117 billion is a lot of money. It's the same size as the entire market value of Amazon.com (NASDAQ:AMZN), there are only 20 companies in the S&P 500 worth more than the entire cash balance Apple keeps on its books. Of course people are going to be fascinated with how Apple plans to use it.
However, a recent article from Tristan Louis caught my eye this weekend. In the article he argued that Apple should buy wounded mobile giant Nokia (NYSE:NOK). Such a move is surely on the more interesting side of discussions about what Apple should do with its cash, so let's take a look and see whether the idea has merit.
The first bullet point in Tristan's article is that Nokia's patents would hold large amounts of value. Such an idea is hardly new, as one of the main points in any Nokia bull thesis normally emphasizes that the company trades at the value of its patents, leaving its core business effectively value-less. More to the point, Apple has paid for mobile standard patents before, when it joined a consortium that carved up Nortel's patents, and is at risk of being sued by arch-mobile enemy Samsung over infringing on LTE patents (and Nokia holds its own set of essential LTE patents). Then there's a precedent that's been set in the space, when Google paid more than $12 billion for Motorola in part for the company's own patent treasure trove.
Second, Tristan notes that Nokia shelled out $8 billion for Navteq just five years ago, so Apple could integrate Navteq into its Maps offering. If you haven't heard, Maps hasn't exactly been popular since its introduction.
As final points, Tristan notes that Nokia could provide expertise with TV-to-mobile devices, thast its Nokia Siemens division could be transferred to Alcatel-Lucent (UNKNOWN:ALU.DL), and that such a move would have the added sweetener of taking out Microsoft's (NASDAQ:MSFT) mobile sidekick.
Will Apple buy big?
Those are definitely a lot of points to chew on, and I think the article is really an interesting thought exercise, but here are some reasons I remain cautious on the idea that Apple would use its cash on a company like Nokia.
First things first: Apple doesn't buy big. To date, the company's largest acquisition remains NeXT back in 1997 for a bit more than $400 million. In recent years while its cash pile was swelling, Apple has limited its largest deal to Anobit, a company that creates flash controllers, for a reported $390 million. Apple has also made smaller deals for Siri, maps, processor designs, mobile security, and a litany of other emerging technologies. The key here being that Apple's been buying small companies to build out new services and improving its supply chain. It's just not a company that has a culture to absorb a wide group of non-Apple employees.
The patent play?
You could argue that Apple needs to borrow a line uttered by countless twentysomething males and say "I can change." With its new war chest, it needs to be more pragmatic about acquisitions. In that case, it'd buy Nokia and take the parts it wants (patents, maps, etc.) and leave the rest of Nokia as a separate company to slowly whither away.
But here's the problem I see with that situation: Why would Apple do that? Nokia still made $538 million in cash flow in the past year, but that's down from $5.5 billion in the past year. Without careful attention to a turnaround, the rest of Nokia's business would quickly become a wasteful cash pit, not the kind of distraction an operational genius like Tim Cook wants. If Apple really just wants Nokia's patents, it could always purchase them and create an immediate licensing agreement. With Nokia's credit rating slipping into junk status, such a deal that could shore up the company's balance sheet seems as if it would be on the table.
The angle of using Navteq to beef up Apple's Maps is surely intriguing. However, a big part of Apple's Maps fiasco is the backend complexity of trying to integrate so many providers into the Maps service without a proper testing period. Apple's famous devotion to secrecy also isn't much of an asset on software like Maps, which relies on a huge user base to identify bugs that can be squashed.
My fear here is that integrating Navteq (Apple currently relies on TomTom for mapping data) would be a headache that the company is ill-equipped to handle. Would Apple be willing to toss out its years of work on Maps and start over by building features like 3-D flyovers into Nokia's current Maps offering? The complexity here is admittedly over my head, but I do find the idea of having Apple buy Nokia's Navteq asset to be intriguing.
Finally, let's look at the competitive aspects of an Apple buyout of Nokia. Tristan's article proposed a spinoff of its Nokia Siemens infrastructure business to Alcatel-Lucent, but that seems unlikely. Alcatel is busy going through painful restructuring and layoffs as its business sags. Last quarter the company burned about $600 million in cash alone, which is a pretty penny next to its mere $2.4 billion market cap. Also, with a shaky balance sheet, it's not in a position to be wheeling and dealing.
If regulators allowed it, a far more interesting play could have Huawei taking over most of Nokia Siemens' business. In addition, Huawei might have interest in absorbing the less attractive parts of Nokia's mobile business as Nokia still maintains its cachet on the low end of China's mobile market. The only problem here is that Huawei has budding ambitions, and while it's not seen as a preeminent threat today, plenty of similar companies, such as Samsung and HTC, have moved up the value chain after occupying lower rungs in areas like mobile. Apple could be fueling a future enemy in a spinoff to Huawei versus leaving Nokia alone to stammer along.
As far as the idea that an Apple purchase of Nokia would take out a key Microsoft partner, I'm not sure Apple cares enough about Microsoft at this point. Yes, Microsoft's lurking in the smartphone space, but its market share is still anemic compared with Android. Also, as we've seen with what Microsoft did in the tablet space, a loss of Nokia could mean the company just goes with an original device manufacturer to create its own smartphone lines. Yes, this would hurt Microsoft, but Apple's far from a company that would make a $10 billion to $15 billion acquisition just to upset what's becoming a second-tier rival.
Putting it all together
The simple reality is that Apple will probably continue taking smaller bets on emerging technologies, and it's not hard to imagine that Apple's dividend policy could be re-examined, allowing larger payouts as its cash flow swells. Its sure fun for investors to speculate what Apple will do with its cash, but in the end it's one of the less important areas when examining whether the company remains a buy.