The Apple Twitter Merger (in more than 140 characters)

Why Apple should use its cash hoard to buy Twitter
Barry Ritholtz
Washington Post
March 24, 2012

A Tumblr blog called “Things Apple Is Worth More Than” details, not surprisingly, an astonishing list: All of the gold at the New York Federal Reserve; the world’s entire supply of illegal drugs; the franchise value of “Star Wars”/“Star Trek”/Harry Potter/Stephen King/“Twilight” combined; the entire U.S. aircraft carrier fleet; all 32 euro-zone banks.

All of which is to say, Apple is fantastically valuable. In fact, it sports the biggest market cap of any company in the world. This enormous worth comes from two sources: Its $100 billion cash hoard and its highly valued stock.

Last week, we found out what Apple is going to do with some of that cash: It is going to pay a dividend and buy back stock. But that won’t make much of a difference. Apple’s revenue and profit are growing so quickly that this $2.65 per quarter (about 1.77 percent) dividend will barely dent its cash pile. (Apple’s stock is even more valuable.)

The upcoming $100 billion Facebook IPO made me wonder whether Apple needs to get more creative about some of the new competition coming along. No, I am not suggesting it should buy Facebook. (Mark Zuckerberg’s path will not likely run through Cupertino.)

But the dividend/stock buyback started me thinking about all the other things Apple could do. That huge pile of dough and rapidly appreciating currency (AAPL stock) is a powerful combination. It opens up an incredible range of options.

My preference? Use some of that money to make strategic acquisitions that will shore up the few weaknesses Apple has. The preemptive strike could also prevent anyone else from making a move that damages Apple’s position in its chief markets.

Before we proceed, a caveat: I find mergers and acquisitions to be wildly overrated (IPOs as well). Most companies choose poorly; they end up unwinding these deals at great cost eventually. The AOL Time Warner marriage of 2000 may be the poster child of bad mergers. Outside of big resource mergers in oil or minerals, major mergers rarely work out well. A few distressed bank deals worked out — J.P. Morgan Chase’s purchases of Bear Stearns and Washington Mutual, as well as Wells Fargo’s grab of Wachovia. (Most of the banking-sector mergers of the past decades have been disasters.) Companies pay huge iBank fees to conglomerize, and they pay even bigger fees to de-conglomerize. So no, I am not a fan of most of these big deals.

There are exceptions. A handful of firms have made strategic acquisitions into an art form. In the 1980s and ’90s, Cisco Systems was the best tech firm at this; GE also made excellent industrial strategic acquisitions. Oracle has been making larger acquisitions that added to earnings per share over the years (BEA, PeopleSoft, Siebel Systems, Hyperion and SunMicro). Consider Microsoft’s strategic investment into Facebook — they bought a 1.6 percent stake for $240 million in 2007, effectively shutting out Google from cutting a deal.

One acquisition stands out to me as a model for what Apple could do: Google’s all-stock acquisition of YouTube for $1.65 billion in 2006.

Essentially, it was free. The market rallied Google’s stock enough on the news that the acquisition had an effective cost of zero (though it was slightly dilutive to earnings). YouTube became one of the fastest-growing parts of Google, replacing the underperforming Google Video. Monetization of YouTube appears to be increasingly close.

And Apple? Its history is primarily of small, almost tactical purchases. Even its biggest buy, the 1997 purchase of Next Computer that returned the prodigal son Steve Jobs to Apple, was “only” $400 million.

But Apple was a very different company then — a small, niche computer maker, with a visionary at the helm. The Apple of today is a giant consumer electronics firm, selling mobile devices, telephones, tablet computers and, in the near future, televisions. Maintaining mindshare, staying on the cutting edge of consumer tastes, is more important to Apple today than it was 15 years ago.

What is out there for Apple to buy? What is the Apple equivalent of Google Video?

The obvious answer is in social networking, where Apple has not gained any traction. The solution (queue the jeers) is for Apple to scoop up Twitter for $9 billion in cash or stock.

Why Twitter?

Apple does software and hardware very well; it is outstanding at the integration between the two. But it hasn’t managed to break the code for social. In fact, Apple may be the only tech company without a Twitter account. Go ahead, check out @Apple — 0 Tweets/0 Following. As good a piece of software as iTunes is, its Ping social network was DOA. Twitter would automagically make Apple a
de facto player in social.

In fact, Twitter is its own unique product category, and other forms of short messaging are going nowhere fast. The Fed has a Twitter account. The SEC tweets. President Obama and every other presidential candidate tweets. Indeed, nearly every world leader and every major product has a Twitter handle.

Twitter makes even more sense for Apple when we consider who its biggest competitors are likely to be over the next decade. It will no longer be the competitors of olde — not HP or Dell or even Microsoft — but Apple is in a tough battle for the future with the likes of Google and Facebook. It seems that all roads lead us back to social networking, and the best fit for Apple leads to Twitter.

Consider Apple’s last mobile operating system (iOS) upgrade: It tightly integrated “Tweet This” in all of its mobile products and apps. Apple could easily do a strategic investment in Twitter — $1 billion or more — and lock in an inside track with Twitter. But for less than 10 percent of its cash horde, it can acquire an enormous strategic product. Twitter would operate as a stand-alone entity, but built more tightly into all of Apple products as the social network.

Ping gets replaced with a version of Twitter for iTunes; various Apple photo services (and competitors such as Flickr and Instagram) see new competition from iPics. There are innumerable ways to integrate.

Should they? Can Apple achieve its goals without Twitter? Sure. But buying Twitter gets Apple four things:

1. It becomes, presto, a competitive player in social networking.

2. They fix Ping, and begin to monetize it, driving more sales of music, books and video.

3. Apple TV plus Twitter allows tight integration of social with video viewing. Instant social leverage during prime-time viewing has enormous potential value.

4. Perhaps most important, Twitter is kept out of the clutches of Google, Facebook or Microsoft.

Twitter is an IPO candidate in its own right. I suspect that Google might be the better technological fit — infrastructure expertise, monetizing search, etc. — but there seems to be some estrangement between Google and Twitter, for reasons with which I am not familiar.

If Apple buys Twitter, it’s a huge win. It even has an exit: If they decide the deal doesn’t work out, they can spin Twitter out as an IPO. But more importantly, it gives Apple a leg up in this fast-growing space.


Ritholtz is chief executive of FusionIQ, a quantitative research firm. He is the author of “Bailout Nation” and runs a finance blog, the Big Picture. Twitter: @Ritholtz

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