How Apple Might Spend Its Dry Powder
Steve Jobs said during yesterday's conference call that Apple plans to "keep [its] powder dry" for "one or two" strategic acquisitions in the future. He was referring to the $50 billion in cash assets Apple is currently sitting on. What fight is he gearing up for?
By not paying out dividends or using the money to buy back company stock, Apple is making sure the company is uniquely positioned to make acquisitions to defend or augment its place in the market. That cash can go into research and development. More important, it could be used to acquire companies whose resources might strengthen Apple's business or help it expand into new areas.
What might Apple want to buy? How big will it go? It appears that Apple's acquisitions are situation-dependent—and that the company's spending limit is on the rise.
Apple started buying up other companies only three years ago, when its coffers had grown significantly following the iPhone introduction. The company has since made a greater number of purchases of varying deal size every year. As Apple's money pile has grown, its aversion to the risks associated with acquisition has decreased.
Stacey Higginbotham wrote yesterday about the Big 11 tech acquirers, as identified by Deutsche Bank. You'll recognize every name on the list and probably won't be surprised to find Apple up there, alongside major competitors in both the PC and smartphone markets. The way tech is headed, acquisitions are quickly becoming the best way to gain competitive advantage. It's how Apple developed the A4 chip—the component that's probably made the most difference in terms of production costs for Apple's iOS devices.
Facebook: Big Distraction?Having $50 billion in liquid assets brings a wealth of acquisition choices. Google has a mere $30 billion and Microsoft just a bit more—$31 billion. Apple has far more buying power than its competitors. Even something like Facebook could be on the table. The best guesses place the social network's value anywhere from $10 billion to $33 billion, which could potentially put it beyond the reach of any bidder save Apple.
Apple won't be buying Facebook, notwithstanding Jobs' meeting with Mark Zuckerberg and what Peter Kafka thinks at All Things D. It would take a huge chunk of Apple's cash, then prove a massive distraction from its main lines of business. Facebook's contribution to Cupertino's core interests would be negligible. I can see Jobs wanting to acquire some social networking IP to bolster its efforts with Ping, but buying Facebook to accomplish this would be like targeting a fly with a nuclear bomb.
No, Apple's acquisitions will be focused on providing its mobile products with key competitive differentiators. That means battery, streaming, and radio tech. We'll see buys that provide RFID expertise, ways around the battery crunch that's fast becoming the major barrier in mobile tech, and speedy and dependable methods of streaming content to and from smartphones and tablets. This is where battle impends in the mobile sector and it's where Apple's many guns will be pointed when it comes.
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