Friday, February 26, 2010

Apple, $40 Billion in cash, and extreme patience

As I've already stated, I think Apple will have to get into robotics sooner or later, because that's what I expect consumers to vote for with their dollars, euros, yen, and yuan, once the machines become really useful (a matter of another year or two) and once people come to understand how useful they can be. But that's a conclusion without more than a hint about how I arrived at it.

Apple has a lot of money, and some are saying they should be buying back stock or giving shareholders a dividend. Steve Jobs doesn't think either of those options will significantly effect the price of the stock, and prefers to hold onto the cash until an opportunity to make better use of it presents itself. He's also suggesting that something bigger than previous acquisitions might be on the table.

What could Apple buy that would improve their longterm profitability?

Factories? Maybe, but any such facility would need to be staffed, frequently retooled, and operate more economically that those run by the Chinese manufacturing companies Apple currently contracts with.

A foundry? They require fewer people, but the frequent retooling (to keep up with process technologies) would be a huge expense, and why go to the trouble if contract foundries are producing the quality you need at a reasonable price and respecting your need for secrecy.

Any kind of presence in emerging markets? Well, yeah, but the iPhone is already doing a pretty good job of opening those doors, and getting into the thick of local competition could prove counterproductive. Sprinkling China liberally with Apple Stores is a good approach, and one that will probably also work well in India.

Less than successful technology companies, for their engineering talent? Apple hires the best people they can find, with skills that are well aligned with the needs of the company. Such people are likely to be as rare as hen's teeth in tech companies of no particular relevance, available at bargain basement prices. Still there might be the rare instance when a fortuitous patent or two could sweeten the deal sufficiently.

So, okay, let's get over the idea that Apple is about to go on a random shopping spree, and try to anticipate what sort of deal would look worthwhile to Steve Jobs and Apple's executives and Board of Directors.

It would have to be something that built on what Apple already is, which is a pretty complicated subject in itself. Apple is many things, mostly relating to digital electronics and electromechanical devices (see following post), their programming, their packaging as products, their marketing, and aftermarket sales including music and movies. There's a lot of ways to hook into this framework, and therefore a lot of different types of companies that might make useful additions. An important question is what direction does Apple want to grow faster than it might via individual hires and in-house R&D.

For a smaller company, the employees of which would be absorbed into Apple's existing structure, the culture doesn't matter so much, but if the company to be acquired is large enough that some substantial part of it would essentially be appended to Apple, with employees continuing to work with and report to the same people as before, it would be more important that the company's culture be compatible with Apple's. This is perhaps less of a problem if the company to be acquired is physically remote from Apple's main campus, allowing some breathing space for both.

Application of these filters may reduce the field tremendously, but they still leave many potential acquisitions to pick from, far too many to allow an outsider to predict what Apple will do.

We will just have to wait and see.

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