By the looks of it, Apple seems to be legitimately interested in the electric car market. Speculation has intensified following a series of reports from numerous outlets, suggesting that Apple has already assigned hundreds of engineers on "Project Titan."
Investors have long dreamed of Apple acquiring Tesla Motors , given the disruptive characteristics and cultural similarities between the two companies. Tesla has also reportedly poached over 150 employees from Apple, underscoring said cultural similarities.
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But recently, entrepreneur and venture capitalist Jason Calacanis made a bold prediction: that Apple would acquire Tesla for an astounding $75 billion. Better yet, Calacanis expects this mega deal to occur within the next 18 months, even going as far as calling it "a lock" in his mind. Don't get me wrong; with Tesla as my second-largest personal holding, I'd be thrilled if it got bought out at three times the current price.
Unfortunately, that's simply way too much money.
Hey, small spenderHistorically, Apple's monetary ceiling for acquisitions has been in the neighborhood of $500 million. The Mac maker usually targets small companies with negligible revenue and innovative technology that can be integrated into future Apple products. That all changed when Apple shocked investors by acquiring Beats last year for $2.6 billion, or over five times its normal maximum price.
Beats' financials left a lot to be desired, and Apple recorded $2.2 billion in goodwill with almost $640 million allocated to acquired intangible assets. Apple then assumed nearly $260 million of Beats' net liabilities.
Tesla is a lot of things, but one thing that it's not is a steal. Investors are certainly pricing in high hopes for its disruptive future. A quick look at its valuation metrics relative to other automakers is all it takes.
Source: Reuters. TTM = trailing-12-months. MRQ = most recent quarter.
Apple has never been about big flashy acquisitions, and a $75 billion acquisition of any company is almost 30 times larger than its biggest acquisition. Even at Tesla's current $25 billion market cap, it remains a somewhat speculative investment that's arguably already priced for perfection. And we're talking about Apple buying it for three times the current price in a matter of months.
Analysts are modeling for Tesla to bring in $8.6 billion in revenue in 2016. If Apple theoretically bought the electric carmaker at the end of 2016 (and those estimates prove accurate), it'd be paying 8.7 times sales. Tesla currently has less than $5.5 billion in tangible assets on its balance sheet, so Apple would be forced to record an absurd amount of goodwill and intangible assets if it did a $75 billion deal.
Goodwill huntingOne of the biggest benefits for adopting a conservative acquisition strategy is minimizing the amount of goodwill and intangibles that sit on the balance sheet. This reduces the risk if acquisitions don't work out well. Apple is currently carrying just $9 billion in total goodwill and intangibles, or 3.4% of total assets, with much of that coming from Beats alone.
Source: SEC filings.
Contrast that with other tech giants for some additional perspective.
Source: SEC filings. MRQ = most recent quarter.
A single, massive $75 billion acquisition of Tesla would promptly throw decades of discipline out the window, and expose Apple and its shareholders to considerable risk. It's also not as if Apple could realize a lot of cost-saving synergies. Tesla's operations are very capital intensive since it directly manufactures vehicles, while Apple prefers to utilize contract manufacturers while keeping its supply chain incredibly lean. Most importantly, the two companies play in completely different markets, further minimizing the potential for synergies.
Sorry, Calacanis, but it's not happening.
The article 1 Simple Reason Why Apple, Inc. Won't Buy Tesla For $75 Billion originally appeared on Fool.com.
Evan Niu, CFA owns shares of Apple, Facebook, and Tesla Motors. The Motley Fool recommends Apple, Facebook, Ford, General Motors, Google (A shares), Google (C shares), and Tesla Motors. The Motley Fool owns shares of Apple, Facebook, Ford, Google (A shares), Google (C shares), and Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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