Analysts love to wonder about a megadeal. The potential for a massive acquisition, while small, fuels an inordinate amount of speculation among the financial community. While most megadeals never come to fruition, there is the occasional giant merger -- like the recently announced deal between Disney (NYSE: DIS) and Twenty-First Century Fox (NASDAQ: FOX) (NASDAQ: FOXA), valued at $52.4 billion.
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Apple (NASDAQ: AAPL) is a frequent subject of these musings. Its massive war chest, most recently reported at $269 billion, gives the company ample resources to purchase any number of companies to further its corporate goals.
The latest round of conjecture was sparked by a note from Citi analysts Jim Suva and Asiya Merchant who reported that there is now a 40% chance that Apple will buy streaming pioneer Netflix (NASDAQ: NFLX).
Tax law changes
Recent U.S. tax legislation will impose a 15.5% one-time tax rate to repatriate abroad profits, compared to the previous corporate rate of 35%. With the $252 billion Apple keeps on its books abroad, the company could potentially bring home the entire cache for just upwards of $39 billion, much of which the company has already set aside. The remaining funds could be used for returning capital to shareholders, or a theoretically large acquisition.
The analysts ranked several companies in order of potential likelihood that they could be acquired by Apple. They ranked Netflix as highest at 40%, followed by Disney between 20% and 30%, and Activision Blizzard, Inc., Electronic Arts Inc., and Take-Two Interactive Software, Inc., each garnering a 10% chance. It's important to note that the missive was written prior to the recent announcement of the Disney deal, likely removing it from the equation.
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Could it happen?
There are a number of compelling reasons to believe that a deal of this magnitude won't happen. Apple has been remarkably consistent in its disciplined strategy regarding mergers and acquisitions. The company's largest purchase was its acquisition of Beats Music for $3 billion in 2014, with multitudes of smaller ones being the norm.
During the conference call to discuss Apple's first-quarter 2017 results, CEO Tim Cook was asked by an analyst about the $200 billion in cash and the possibility for "potentially larger M&A," specifically around owning original content.
Cook noted that the company had acquired 15 to 20 companies per year in each of the last four years, and while the company would consider any size acquisition, the decision would be based more on the "strategic value" of the potential candidate.
But does it make sense?
There are those who believe such acquisitions would have negative consequences. Noted equity valuation expert and academic Aswath Damodaran has previously stated that the best thing Apple could do with its cash hoard is "nothing."
Cash is not the problem. It's what they could do with the cash that could potentially be a problem. It can become a problem if people stop trusting management and you know what could cause people to stop trusting management? A big acquisition.
On the other hand, a deal to purchase Netflix might fit a number of Apple's strategic goals. The company has gradually been dipping its toe into the streaming market with critical flops like Carpool Karaoke and Planet of the Apps, and is reportedly planning to spend $1 billion in 2018 to develop original content. Apple previously announced its intention to double the revenue from its services business to $50 billion by 2021. Netflix has estimated that its revenue will exceed $11 billion in 2017, which would provide Apple with a big chunk of its stated goal.
It's probably not gonna happen
While these experiments make for interesting headlines, the likelihood of them coming to fruition is slim. Apple's acquisition history shows that it favors buying smaller companies to help it achieve a specific objective, like its recent purchase of streaming music service Shazam for an estimated $400 million. The app, which helps users identify songs from a short audio clip, would help Apple improve the appeal of its streaming music service, leading to greater customer retention and more subscribers.
I'm not saying a deal isn't possible, but paying a 30% to 40% premium on top of Netflix's current market cap of $89 billion would value the deal at between $116 billion and $125 billion. It would make more sense for Apple to gradually develop its own streaming service -- and it would be far less expensive.
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Danny Vena owns shares of Activision Blizzard, Apple, Netflix, Take-Two Interactive, and Walt Disney and has the following options: long January 2018 $25 calls on Activision Blizzard and long January 2018 $80 calls on Walt Disney. The Motley Fool owns shares of and recommends Activision Blizzard, Apple, Netflix, Take-Two Interactive, and Walt Disney. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends Electronic Arts. The Motley Fool has a disclosure policy.