What Horace Dediu Gets Right...and Wrong
Horace Dediu of Asymco had a great FAQ regarding Apple’s (AAPL) $268 billion cash horde. I highly recommend reading it if your wondering why Apple takes out loans when they have so much cash or why they buy back stock.
I especially liked this part from his article.
I especially liked this part from his article.
Question: Why does Apple need to pay shareholders?
Answer: Because it’s their money.
Simple and to the point. If there’s one thing that bugs me about tech writers, it’s how many of them speak about Apple’s shareholders as if they are some kind of parasitic drag on the company. To the contrary, they own the company. Tim Cook is no more the owner of Apple than the guy who takes your order at McDonald’s owns the restaurant. Okay, I’m exaggerating a bit here, because Tim does own stock in Apple. But his percentage of the total is so small that the shareholders could still fire him and shut down the company if they chose.
Apple exists for the shareholders. Just like the corner dry cleaners store exists for its owner or your eBay business exists for you.
The only part of Dediu’s article that I have a disagreement with him on is the question and answer section on acquisitions.
Question: What about acquisitions?
Answer: Why not buy other companies?It buys companies but usually small ones which are essentially acquisitions of teams and their intellectual property. Apple does not buy “business models” or customers or cash flows which is what large companies are valued for. Operationally, it’s also because Apple has a strong culture and it wishes to preserve it. Acquisitions dilute culture which is why integrations often fail. Statistically, large acquisitions are value destructive and the larger they are, the more likely they are to fail. Incidentally, when a company is acquired with cash that hole in the balance sheet is filled with something called “goodwill” which reflects some intangible value of the new asset. If and when the acquisition is deemed to have failed the goodwill is written off and so is shareholder equity. That’s how shareholders are robbed.
There are two different reasons for an acquisition of another company that is as big or bigger than your own. One is to boost profitability, the other is to solve a problem.
Dediu is making the assumption that Apple doesn’t need to do a large acquisition because they don’t need to boost profitability. That is because large acquisitions are often about boosting synergies and lowering costs. For example, two small auto companies merging would be able to get a better price on steel and would be able to lay off redundant head count. A good example of this would be the spectacularly successful merger of HP and Compaq. Contrary to what many of the naysayers said during Carly Fiorina’s unsuccessful run for the Republican nomination, the merger was a home run.
I agree with Horace that Apple doesn’t need to spend its money on a large acquisition in order to cut costs or boost profitability. But that’s not the only reason to do an acquisition. Often, these large acquisitions are more about solving a problem or shoring up a weakness. For instance, Bass Pro Shops recently purchased Cabela’s. Why? Because Bass Pro Shops didn’t invest in a vibrant online internet store like Cabela’s, and they don’t have anywhere near the catalog business that Cabela's has. This merger/acquisition helps to fill a hole that Bass Pro has because they don’t have time to build their own solution while Amazon happily poaches more of their customers.
Further, if a large acquisition is not about boosting synergies and cutting costs, integration doesn’t have to happen. To say that Apple’s culture would be diluted is not a given. In fact, the opposite could happen. If Apple’s executive management team starts to get distracted by launching a new media business, their current hardware business could suffer. Tim Cook, Eddie Cue, Phil Schiller, et al, only have so many hours in the day.
Apple could potentially acquire a large company with media experience and let them handle getting this new media business off the ground. This would free up Apple’s executive team to do what they’ve always done, design great hardware. Apple could leave the acquired company a wholly owned subsidiary and not integrate the two. But they could still take what they need from their subsidiary since they own it.
Apple seems to be gearing up for some kind of foray into video streaming. So now they have a need for media. Both original new media and perhaps a back catalog of movies and shows. Looking at a Disney acquisition would give them access to a lot of media. The Pixar team has a proven record of cranking out hit after hit and the Star Wars franchise would be wholly owned by Apple. This would solve a big problem for Apple.
Now available in iBooks —> The Tesla Bubble
Answer: Because it’s their money.
Simple and to the point. If there’s one thing that bugs me about tech writers, it’s how many of them speak about Apple’s shareholders as if they are some kind of parasitic drag on the company. To the contrary, they own the company. Tim Cook is no more the owner of Apple than the guy who takes your order at McDonald’s owns the restaurant. Okay, I’m exaggerating a bit here, because Tim does own stock in Apple. But his percentage of the total is so small that the shareholders could still fire him and shut down the company if they chose.
Apple exists for the shareholders. Just like the corner dry cleaners store exists for its owner or your eBay business exists for you.
The only part of Dediu’s article that I have a disagreement with him on is the question and answer section on acquisitions.
Question: What about acquisitions?
Answer: Why not buy other companies?It buys companies but usually small ones which are essentially acquisitions of teams and their intellectual property. Apple does not buy “business models” or customers or cash flows which is what large companies are valued for. Operationally, it’s also because Apple has a strong culture and it wishes to preserve it. Acquisitions dilute culture which is why integrations often fail. Statistically, large acquisitions are value destructive and the larger they are, the more likely they are to fail. Incidentally, when a company is acquired with cash that hole in the balance sheet is filled with something called “goodwill” which reflects some intangible value of the new asset. If and when the acquisition is deemed to have failed the goodwill is written off and so is shareholder equity. That’s how shareholders are robbed.
There are two different reasons for an acquisition of another company that is as big or bigger than your own. One is to boost profitability, the other is to solve a problem.
Dediu is making the assumption that Apple doesn’t need to do a large acquisition because they don’t need to boost profitability. That is because large acquisitions are often about boosting synergies and lowering costs. For example, two small auto companies merging would be able to get a better price on steel and would be able to lay off redundant head count. A good example of this would be the spectacularly successful merger of HP and Compaq. Contrary to what many of the naysayers said during Carly Fiorina’s unsuccessful run for the Republican nomination, the merger was a home run.
I agree with Horace that Apple doesn’t need to spend its money on a large acquisition in order to cut costs or boost profitability. But that’s not the only reason to do an acquisition. Often, these large acquisitions are more about solving a problem or shoring up a weakness. For instance, Bass Pro Shops recently purchased Cabela’s. Why? Because Bass Pro Shops didn’t invest in a vibrant online internet store like Cabela’s, and they don’t have anywhere near the catalog business that Cabela's has. This merger/acquisition helps to fill a hole that Bass Pro has because they don’t have time to build their own solution while Amazon happily poaches more of their customers.
Further, if a large acquisition is not about boosting synergies and cutting costs, integration doesn’t have to happen. To say that Apple’s culture would be diluted is not a given. In fact, the opposite could happen. If Apple’s executive management team starts to get distracted by launching a new media business, their current hardware business could suffer. Tim Cook, Eddie Cue, Phil Schiller, et al, only have so many hours in the day.
Apple could potentially acquire a large company with media experience and let them handle getting this new media business off the ground. This would free up Apple’s executive team to do what they’ve always done, design great hardware. Apple could leave the acquired company a wholly owned subsidiary and not integrate the two. But they could still take what they need from their subsidiary since they own it.
Apple seems to be gearing up for some kind of foray into video streaming. So now they have a need for media. Both original new media and perhaps a back catalog of movies and shows. Looking at a Disney acquisition would give them access to a lot of media. The Pixar team has a proven record of cranking out hit after hit and the Star Wars franchise would be wholly owned by Apple. This would solve a big problem for Apple.
Now available in iBooks —> The Tesla Bubble
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