Why Apple On The Prowl Is A Good Sign

By Bruce Kelly AAA

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.

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