Apple Inc.’s (Nasdaq:AAPL) potential $3.2 billion acquisition of supercool headphone maker Beats Electronics shows that CEO Tim Cook is beginning to wheel and deal in a fashion that Steve Jobs, his legendary predecessor, would have found repugnant.

The Cupertino, Calif.-based company’s interest in buying Beats Electronics, which also is home to an online music service, was first reported last week.

The market on Friday hated the news, with Apple losing more than $2 billion in market capitalization. Investors believe that Apple is either paying too much for the company or it’s not a simply not a strategic or tactical fit.

Tech nerds immediately took to social media declaring their hate of an Apple deal for Beats.

Out of Ideas?

“Buying Beats Audio […] is a good sign that Apple is pretty much out of ideas & unable to come up w/an anti-Spotify strategy,” wrote Om Malik, a longtime technology writer turned investor, on Twitter. Such a comment was typical. Malik also said the Beats’ headphones were lousy and its streaming service was junk.

“I am down on this deal,” Malik wrote later in a blog. “This is a reactive move at best. Steve Jobs’ Apple would have pushed to make something better, but even he struggled to come to terms with Internet and Internet thinking. That hasn’t changed.”

The collective wisdom among the nerds is that Apple doesn’t make big splashy buys. Under Jobs, Apple’s legendary success came from building ultra-hip, revolutionary hardware: the iPod, the iPhone and the iPad. Cook became CEO in 2011, after Jobs’ death.

Build vs. Buy

Apple doesn’t buy, it builds, and the day it begins to buy it’s no longer Apple.

Beware such groupthink. Beats Electronics, with about $1.3 billion in annual sales, is a tantalizing target. It’s been reported that the headphone company saw sales grow five times from 2010 to 2012. What other tech company has grown revenues at the same pace as Beats?

Founded by old school hip hop performer and producer Dr. Dre and legendary rock producer Jimmy Iovine, Beats Electronics epitomizes cool. Trendsetting hipsters love the Beats Electronics headphones, and its streaming music app could perhaps fit nicely into the iTunes franchise, which has seen its market share of music sales sag to about 50% from 70%.

The smart money on Wall Street clearly has a shine for Beats Electronics. Indeed, legendary private equity investor The Carlyle Group paid $500 million for a little less than a half-share in Beats last September. At the time, the company was valued at about $1 billion. Beats’ value has tripled in about eight months because it dominates the market with about two-thirds of the sales for high-end headphones at $100 or more.

Apple on the Prowl

Cook sees Beat’s lead in headphone hardware as a good match for how Apple dominates consumer electronics hardware. Just this month he said that Apple “was on the prowl” for acquisitions.

A $3.2 billion price tag on Beats would make it the largest acquisition in Apple’s history.

Investors should remain calm. The potential price for Beats is a fraction of the $19 billion in cash and stock that Menlo Park, Calif.-based Facebook Inc. (Nasdaq;FB) said in February it was paying WhatsApp, a messaging service that works across different smartphones. Facebook, like Menlo Park-based Google Inc. (Nasdaq:GOOG), makes is money by getting people to use software and Internet services to generate traffic. Apple’s focus is high-end hardware. That’s why a purchase of Beats makes sense.

Huge War Chest

And even after such a deal, Apple would have about $16 billion in cash for more deal making and another $190 billion that remains parked offshore, free and clear of U.S. taxes.

What the nerds miss is that this kind of deal is not intended to transform Apple. Rather, it will put Dre’s headphones next to Jobs’ iPads and iPhones in Apple stores so kids this holiday season will have more reasons to buy Apple products.

The Bottom Line

The nerds should relax. Cook still has time to prove he can create killer hardware on his own. And buying Beats Electronics puts Apple’s engineers on notice that the boss is not afraid to go outside the company to pursue consumer electronic excellence. That’s what smart, mature companies do to stay ahead of the pack.

Related Articles
  1. Term

    Why You Should Consider Investing In the Tech Industry

    The technology industry offers huge investment opportunities.
  2. Investing Basics

    A Primer On Investing In The Tech Industry

    The tech sector can provide fantastic returns for investors with a little know-how in the field.
  3. Investing

    Why Are Startups Going International?

    Expansion into international markets, if it occurs, is the final stage of a startup's evolution. Lately, though, the opposite has been happening; international expansion now occurs fairly early ...
  4. Investing

    Sergey Brin Biography

    Sergey Brin is an American computer scientist and businessman, who, with Larry Page, co-founded Google, which is among the most profitable internet companies in the world.
  5. Stock Analysis

    Net Neutrality: Pros and Cons

    The fight over net neutrality has become an amazing spectacle. But at its core, it's yet another skirmish in cable television's war to remain relevant.
  6. Investing

    The European Effect on Google's Bottom Line

    The EU is turning up the heat on Google. What effect will it have on the company's bottom line?
  7. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  8. Stock Analysis

    5 Reasons Thoratec Corp. Keeps Impressing Investors

    Learn about Thoratec Corporation and its position in its industry. Understand five key factors why the company has impressed investors.
  9. Stock Analysis

    The 6 Worst Technology Stocks of 2015

    Learn about the technology sector and how it has performed in 2015. Understand the six worst performing technology stocks by average return in 2015.
  10. Entrepreneurship

    Top 5 Startups That Emerged in Denver

    Learn why Denver is one of the hottest markets in America for startups, and identify five of the top startups that are emerging from the Denver market.
  1. Weighted Average Cost Of Capital ...

    A calculation of a firm's cost of capital in which each category ...
  2. Runoff Insurance

    An insurance policy provision that provides liability coverage ...
  3. Hunting Elephants

    The practice of targeting large companies or customers.
  4. Precedent Transaction Analysis

    A valuation method in which the prices paid for similar companies ...
  5. Poison Put

    A takeover defense strategy in which the target company issues ...
  6. Assented Stock

    A share of stock owned by a shareholder who has agreed to a takeover.
  1. How does Tim Cook's vision for Apple differ from that of the late Steve Jobs?

    Before his death in 2011, billionaire tycoon Steve Jobs handed over control of Apple to Tim Cook, then the company's Chief ... Read Full Answer >>
  2. How long does it take to execute an M&A deal?

    Even the simplest merger and acquisition (M&A) deals are challenging. It takes a lot for two previously independent enterprises ... Read Full Answer >>
  3. What factors make it difficult to compare performance ratios between retail stocks?

    Companies that operate in the retail sector significantly differ in terms of their profitability and efficiency, making stock ... Read Full Answer >>
  4. What role does the OEM (original equipment manufacturer) play in the finished product?

    Original equipment manufacturers (OEMs) do not typically play much of direct role in determining the finished product. However, ... Read Full Answer >>
  5. What are some common accretive transactions?

    The term "accretive" is most often used in reference to mergers and acquisitions (M&A). It refers to a transaction that ... Read Full Answer >>
  6. What is the difference between an OEM (original equipment manufacturer) and a VAR ...

    An original equipment manufacturer (OEM) is a company that manufactures a basic product or a component product, such as a ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!