Goldman Sachs: Apple is primed for a much larger acquisition than $3 billion Beats
- After paying taxes, Apple will have about $200 billion in newly available overseas cash to play with, according to Goldman Sachs.
- "On M&A in particular, Apple's ability to unlock it's significant overseas cash balance likely provides potential for larger acquisitions than the company's historical preference for tuck-in deals."
- Apple's largest acquisition to date was Beats, valued at $3 million.
- Citi believes Apple could pay $74 million for Netflix.
Goldman Sachs analyst Rod Hall and his team initiated coverage of Apple with a February 6 note which argues the company is now primed for a larger M&A move than the company is used to.
When Apple acquires other companies, it tends to do small "tuck-in" or "acquihire" deals, in which it buys small teams or nascent technologies and apps. Apple tends not to do blockbuster buyouts of household-name companies valued in the multiple billions of dollars. Its largest-ever acquisition was Beats, the headphones company, at $3 billion.
But that might be about to change, due to the Trump corporate tax cut, according to Goldman's Hall. The tax cut allows Apple to bring back to the US up to $252 billion in cash at a much lower tax rate than previously. After settling a $17 billion tax bill in Ireland, and paying the new, lower US tax bill, Apple will have an M&A war chest of about $200 billion available, the Goldman team says:
"We see capacity for several cash usage scenarios including an increased buyback (GSe $192bn over FY18-FY20), a higher dividend payout, and larger, more meaningful M&A, all of which could be positive events for the stock."
"... Based on Apple's anticipated $38bn repatriation tax payment, we expect the company to repatriate almost all of its $252bn in overseas cash. After also accounting for the company's $17bn Irish tax settlement bill, Apple still has nearly $200bn of repatriated cash which provides significant capacity for buybacks, dividend increases and M&A. On M&A in particular, Apple's ability to unlock it's significant overseas cash balance likely provides potential for larger acquisitions than the company's historical preference for tuck-in deals."
Hall's take is similar to that of Citi analysts Jim Suva and Asiya Merchant, who argued last year that Apple has a 40% chance of acquiring Netflix. Apple has struggled to give its users a compelling video product. iTunes has been a huge hit, but Netflix, Amazon and Hulu have captured traditional TV viewers as they move to the web. Netflix would probably cost about $73 billion - well within Apple's cash budget, Citi believes.
A takeout of that size might cost so much, or be so dilutive to AAPL, it could hurt the stock, Goldman Sachs says:
"To-date, Apple's largest acquisition was the $3bn purchase of Beats in 2014; a significantly larger purchase could both pressure Apple's industry-leading margin structure and raise the level of execution risk as the assets are integrated."
