Sunday, January 13, 2013

Apple + Square^2 = $50 billion

Apple Acquisitions

The growth in Apple's (AAPL) sales is undoubtedly starting to slow and unless they move into new markets and more importantly, create the next "wow" product, we won't see too much sales acceleration for the tech titan.  When it comes to inorganic growth, Apple isn't known for acquiring companies to supplement its sales, but more as for acquiring technologies to help develop future products.  Products such as Siri, the digital personal assistant application and Apple Maps, the disastrous mapping software came as a result of acquisitions.  With a pile of $130 billion in cash and liquid securities, it is time for senior management to start thinking about either increasing their dividend or making some substantial investments in growing start-ups.  The largest acquisition Apple has ever made has come in 1997 when they bought NeXT in order to bring Steve Jobs back to company.  I believe they got what they paid for with that acquisition, but as of late, they have been acquiring fairly small companies like flash memory firm Anobit, and biometric developer by the likes of AuthenTec.  I do not believe that these are “disruptive” acquisitions that will move the ticker for a company with such a monstrous market cap.

Tech Growth Themes

Forbes editor Rich Karlgaard said, "Two laws govern the management of tech companies. One is Moore's law. The other is Gretzky's law, which says to skate where the puck will be." Apple has long been "where the puck will be," and it shows as the company has a presence in many of the strong secular growth themes.  Steve Jobs predominately invented the Mobile Internet space while following his vision to create the iPhone and the iPad.  Today the Mobile Internet boom has grown to where devices outnumber the amount of people on the planet. They have presence in the Cloud, with their fairly successful iCloud platform.  They also have Solid State after the Anobit acquisition.  Apple is even looking into Biometrics for security with the acquisition of AuthenTec.  Fingerprint scanning home buttons are not far on the horizon.  The areas in which Apple is lacking a presence happens to be in two of the hottest themes in the tech space.  Apple is still nowhere to be seen in the realm of Social Networking, and the same goes for Mobile Payments.  In order to be the premier technology company in the world, Apple will need to fill the void in these themes in order to cross sell its huge cult-like following to create more value for shareholders;  similarly to how Wells Fargo cross-sells customers on checking accounts, mortgages, retirement planning and insurance.  Tim Cook must realize that cult-like followers like the idea of Apple being a "One Stop Shop", which in turn will create a vast amount of value for shareholders.


Launched in 2009, the popular location based networking platform has been struggling to monetize as of late.  The start-up has been losing money quarter after quarter.  Just recently, research firm PrivCo predicted that Foursquare will either fail by the end of 2013, and or will be acquired for $50 million; $28 million less than investors such as Union Square Ventures, Andreesen Horowitz and O'Reilly AlphaTech Ventures have invested in the company.  On its series B round Foursquare raised $50 million on a $600 million valuation.  But it is evident that the value of the company has only decreased as monetization efforts have failed.  With no way to increase revenues and a stagnant unique user base, an IPO would be impossible at this point in time, therefore it is only a matter of time until the VCs force Foursquare to sell the company.

With the Apple Maps debacle, Apple needs a way to supplement its software.  It was recently reported that Apple was in talks with Foursquare to integrate Foursquare's local data into Apple Maps.  I say, what is the point?  They might as well buy the company and holistically integrate Foursquare into Apple Maps.  This would instantly bring together the Foursquare customer base with the Apple following and build a 3D map/location based social network that Apple could integrate into iOS.  Apple possesses the power to achieve something that Foursquare, as a company, could not. They can intrigue local businesses into offering loyal customers discounts for their Foursquare check-ins and reviews.  With one swift move, Apple can declare war on Google (GOOG), Yelp (YELP) and Urbanspoon by taking market share in the local review business as well.  Realistically speaking Apple could offer Foursquare $400 million, $200 million less than Foursquare's last round of funding. The VCs will push Foursquare to accept the offer in order for them to clean their hands of the investment and pay back investors.  For Apple, $400 million is simply a rounding error.


One of the hottest themes in tech today is the Mobile Payments space.  Founded by Jack Dorsey, who also founded Twitter, Square is a best of breed company in a space littered with competitors such as PayPal, Amazon (AMZN), Intuit (INTU), WePay, BOKU, Stripe and Apriva.  PayPal being the only other dominate player, Square has grown parabolically since its launch in May 2010.  In order to take on the 800 pound gorilla in the room (PayPal), Square must be acquired.  Apple's weak attempt to take a foothold in the Mobile Payments space with its Passbook app hasn't gained any traction thus far.  Acquiring Square would be the quintessential move for Apple to grab dominate market share in a fast growing industry.  They can integrate Square with iOS, automatically giving customers with an AppleID a Square account.  Discounts could be offered for purchases on iTunes and in the Apple Store using the Square as a Mobile Payments platform.  They could really start to give PayPal a run for their money in the online and Mobile Payments space with Square under its belt. This kind of acquisition can even give Apple a lot of commercial and enterprise traction.  In the future we could see point-of-sale terminals replaced by iPads with the Square card reader device.  There is even a look to Square that makes one think of Apple products, clean and simple to use. Investors will soon realize that moves like these are ones that would definitely move the ticker for Apple and make Wall Street happy again.

Fortune magazine in a recent article has valued Square at $3.25 billion.  Given that Apple will probably have to pay a premium for Square because it is one of the hottest tech start-ups in the private placement market right now, a $4 billion offer should do the trick.  That may seem expensive for a private start-up, but Apple can instantly add tens of billions of dollars to Squares transactions and customer base.  The synergies would be too great to pass up.


For $4.4 billion Apple can acquire Square and Foursquare and give itself a strong foothold in every hot theme in the tech space.  Apple will finally be able to cross sell its customers in using all things Apple. Other future acquisitions that could be interesting would include Waze and The Fancy. Also strategic investments in Twitter, Fusion-IO (FIO) and start-ups which develop nano-battery technology for super long battery life could prove to be very beneficial for the long term view.  In the out years, it is not inconceivable that this will add $40-50 billion in value to the company.  But with their giant cash pile sitting in a hedge fund called Braeburn Capital, they better start focusing back to their core business, which is to innovate and be the best consumer tech company on the market. 

Disclosure: I am long AAPL 

No comments:

Post a Comment