updated 07:18 pm EDT, Thu May 8, 2014
Acquisition, if true, would be Apple's largest buyout ever by nearly 10x
In what could be a rumor intended to manipulate stock prices, the Financial Times is reporting that Apple is planning to buy the maker of the popular (though not well-regarded by audiophiles) Beats headphones and Beats Music streaming service for $3.2 billion. If true, the deal would be by far the largest-ever acquisition by Apple. Coincidentally, the report's alleged price for Beats -- more than three times higher than its valuation -- is the exact same amount paid by Google for Nest.
It is hard to understand what Apple would be getting for its money. The audio company, co-founded by rap star Dr. Dre and record executive Jimmy Iovine, has done very well for itself with its Beats line of headphones, but most of its other business ventures have been notably less successful. Its Beats Audio, once prominently featured on some Android smartphones, has been removed from HTC offerings. The headphones, popular with rap music listeners, have been savaged by critics in reviews. Its Beats Music service shows no signs of taking off, or becoming a threat to iTunes.
The Financial Times report, clearly written by two people who aren't familiar with Apple, quote unnamed sources "familiar with the deal" and say it could be announced as early as next week, but also say "talks could still fall apart," leaving the entire story with a dubious impression of reliability. The skepticism is heightened by the story's inability to articulate exactly what Apple wants from the company, claiming that Apple CEO Tim Cook is attempting to buy a "cool" image to buoy iTunes' "waning popularity" and bolster Apple's image after Samsung's marketing campaigns "have savaged the iPhone's brand."
Cook has said that Apple is "on the prowl" for more acquisitions, however, and he has previously met with Iovine to discuss music streaming services. Iovine, who had also met with Steve Jobs on the topic, pitched an idea called "Project Daisy" that ended up being similar to what Apple created in iTunes Radio, though not precisely the same premise. In his capacity as head of the Universal Music Group, Iovine has worked with Apple on iTunes Radio and other music projects, as well as with the company's rivals.
Up to this point, Apple has never spent more than $400 million on a single acquisition -- and that was for NeXT computer and the services of Steve Jobs in 1997. It paid $390 million for Anobit, a flash memory technology company that has helped Apple with its in-house processor designs, $393 million for Authentec, the company behind the iPhone 5s' Touch ID technology, and $350 million for PrimeSense, makers of 3D motion sensors and the original developers of Microsoft's Kinect camera. While not all of its deals have been made public, the company is thought to have never spent more than a billion dollars in acquisitions in a single year.
As mentioned in the report itself, the high price of the alleged deal may actually backfire on Apple: rather than gaining "street cred" by acquiring the Beats brand, a buyout of that size for a company so meagre in IP assets or technology would likely reinforce the opinion of some investors that without Jobs around, Apple can only innovate through buyouts of other companies -- a view that Apple has been keen to steer clear of.
Another factor that could complicate such a public buyout is the financing. At $3.2 billion, Apple would have to seriously deplete its domestic cash pile (which currently stands at around $16 billion) in order to acquire the company unless other methods such as AAPL stock were used for the buyout. Apple is already taking on some limited debt to pay for dividends and stock buybacks, as most of its enormous cash holdings are overseas and can't be repatriated without a serious tax hit.