The Deal

Forget the rumors that Tim Cook is keen on the content giants, as either would go against Apple’s playbook.     

by Chris Nolter

Given Apple Inc.’s (AAPL) $233 billion cash stockpile and the growing competition for video content, speculation linking the company to Netflix Inc. (NFLX) or Time Warner Inc. (TWX) seems only natural.

Shares of the companies, especially Netflix, surged on Thursday after the Financial Times reported talks between Apple and Time Warner and suggested that Apple CEO Tim Cook should take a look at Netflix. On Tuesday morning, shares of both Apple and Netflix were down slightly, while Time Warner shares edged up.

Such potentially expensive deals don’t match up with Apple’s M&A history and strategy, however.

For starters, Apple has not bought big companies in the past and Reed Hastings’ streaming service has a market cap well above $40 billion.

“While at one point this might have been a good idea it has moved way too high for Apple to consider it,” Jim Cramer, founder of The Deal’s parent, TheStreet, and manager of the Action Alerts PLUS portfolio, which owns AAPL.

Furthermore, Tim Cook might find more efficient uses for the cash if Apple built its own streaming business.

“If Apple launched this service and gave it way for free for a year how many defectors would Netflix have?” Moody’s Investors Service analyst Gerald Granovsky said. “That would cost less than $40 billion.”

Apple has typically paid $50 million to $200 million for acquisitions, Granovsky noted. “It has bought product lines, it has bought IP, it has bought the capability to enhance its current or future products,” the Moody’s analyst said.

Dr. Dre’s Beats, which Apple acquired for $3 billion in 2014, was an anomaly.

“Beats was one of the few companies that had real revenues with very good gross profit margins,” Granovsky said. “The headphones business pays for the acquisition  in three years or so.”

While the valuation of Netflix dwarfs the price tag for Beats, Christian Renaud of research firm 451 Research said that isn’t the only potential snag to a deal.

“This seems to be inconsistent with what they’ve done with video and iTunes and that ecosystem they put together,” he said. “Streaming is taking over. However Apple has really defined the other path, which is rentals and purchases via the iTunes store.”

Already-tense relations between content creators and Apple and Netflix could also get worse after a merger, he noted. Media companies could push for regulatory scrutiny of a transaction.

Much of Apple’s cash is overseas, Renaud said, and would be taxed if repatriated for purchase. It would also be cheaper for the company to raise debt for a purchase.

“I’s unlikely,” Renaud said of an Apple-Netflix combination. “It’s not impossible.”

After all, Apple, which declined to comment for this story, certainly has the resources to buy Netflix. And the halo that long shone above the Cupertino, Calif, company is not as bright as it used to be.

“Tim’s gotten a lot of criticism for not really moving the needle and being as disruptive as Jobs was,” Renaud said. “Maybe his way to fix that is to buy his way out of the problem. You never know.”

Time Warner, with a nearly $60 billion equity valuation, would also be problematic. Apple’s video business involves deals with an array of media groups. “It doesn’t make sense for Apple to buy one content owner, if their goal is to remain the Switzerland of content across all of its platforms and not disenfranchise anyone else,” Granovsky said.

While buying Time Warner, which owns the valuable HBO network, would contradict Apple’s playbook, it makes sense that teams within the tech and media giants have had talks.

“My guess is that when you have $233 billion in cash and you’re trying to expand your business, your corporate development guys have talked to every single corporate development person in the world,” Granovsky said.