Why Apple buying Netflix is a f…ing stupid idea

Daring Fireball’s John Gruber incinerates Bloomberg for suggesting as much.

John Gruber, the dean of Apple bloggers, stopped tweeting about Trump long enough Wednesday to post one of the full-throated rants that made him an internet celebrity.

“I cannot believe,” he begins, “that Bloomberg published this story by Alex Webb and Alex Sherman, “Apple Struggles to Make Big Deals, Hampering Strategy Shifts”. The entire story consists of quotes from investment bankers arguing that Apple should hire investment bankers to make more large acquisitions. Really, that’s it.”

What follows is a paragraph-by-paragraph dismemberment that reaches its climax around the 12th graph:

BloombergTo reach its $50 billion target, the company must find an extra $13 billion in services revenue over the next four years — beyond what it can generate itself. Netflix Inc. ended 2016 with sales of less than $9 billion, so even buying that business may not be enough, the analyst said.

GruberEven a $75 billion purchase of Netflix may not be enough. Who said that with a straight face? These fuckers wouldn’t be satisfied unless Apple drunkenly spent every goddamn penny of their cash.

In Webb and Sherman’s defense, I learned a few things from their reporting. Take, for example, this paragraph about Apple’s acquisition process:

Apple’s deals team is composed of about a dozen people under former Goldman Sachs banker Adrian Perica, and most acquisitions take place at the behest of the company’s engineers. Product managers usually meet every month with Perica’s team members to identify targets with attractive technology or talented engineers, according to a person familiar with the process.

Most acquisitions take place at the behest of the company’s engineers? That would explain a lot.

For a list of Apple’s mergers and acquisitions, click here.

See also: Sacconaghi: Apple would be crazy to buy Netflix

9 Comments

  1. John Kirk said:

    It’s a pretty good rule of thumb that any purchase suggested by anyone outside of Apple would be a bad idea. I’m not trying to be cynical. I really mean it. By the time we identify a target, it’s way too late to acquire them. They’d be way overvalued.

    A second similar rule of thumb is that the best acquisitions are companies we’ve never heard of until after the acquisition is announced. That means the company has 1) not become overly big and 2) has not become overly exposed in the media and, therefore, overvalued.

    A third rule of thumb is that Apple should not be buying companies that make money. Much better for Apple to acquire companies BEFORE they become profitable. You want companies that have great talent, or great tech or great potential, or all of the above, but who have not yet achieved that great potential.

    I’ve always admired Apple’s acquisition strategy. They tend to pick up a dozen or more companies a year with tech or talent that they can immediately integrate into existing products or projects.

    One exception to all of those rules was Beats, and I’m still not sold on that acquisition. It’s probably working out, but if it does, its the exception that proves the rule, not the exception that proves that the current rules of thumb are flawed.

    4
    February 16, 2017
    • Richard Wanderman said:

      The Beats buy logic isn’t clear to me either. Of course, even if it was a colossal mistake, Apple can afford it but it would be nice to understand such large buys.

      0
      February 16, 2017
  2. Fred Stein said:

    I’ll read Gruber’s rant later, with glee.
    It touches two of my many pet peeves: “Apple must…..” and large acquisitions.

    “Apple must….” appears all over the blogosphere and established media. The …. that follows is almost always wrong, shallow and a repeat of someone else’s poor idea.

    Large acquisitions rarely work out. 1) The acquirer pays a premium of 20% over market at least. 2) The best talent in the acquired company leaves, cutting the value by at least another 20%. 3) Integration, removal of redundant functions, and culture clash cost much more than 20%. 4) As top level management plays musical chairs, innovation slows to a crawl. The biggest reason large acquisitions fail is that they serve ego and investment bankers, not shareholders, customers, and employees.

    4
    February 16, 2017
  3. Gregg Thurman said:

    To the adage that “those that can – do, those that can’t – teach”, I;d add: “Those that can’t tell others what they should do”.

    I’ve never read an “Apple should” article that was written by someone that potentially could.

    Without exception they have learned to write 500, or more, words taking opposite viewpoints at the drop of a hat, but know zero about what they write.

    Their readership consists exclusively of those that know even less (if that’s even possible).

    To address the specifics of a Netflix acquisition let me point out that I spend $20 – $25/month renting 4 – 5 movies from iTunes. I also subscribe to Netflix at $9/month (all you can eat). The difference in the 2 services is the quality of the offerings. With the occasional exception Netflix is appealing to the palette an Android user, while the quality of iTunes offerings is more appealing to iOS users.

    I’d venture that Apple makes as much from its rental service as Netflix does from its subscription service.

    The only acquisition that I may support is that of Tesla. Tesla has brand recognition and Apple has the resources Tesla lacks to achieve meaningful scale. Even then I’d be reluctant to pay Tesla’s market cap when achieving Tesla’s potential was the result of Apple’s financial strength.

    1
    February 16, 2017
  4. Ken Cheng said:

    Here’s a question, how many $50B+ deals ever work out? Because an acquisition of Netflix or Tesla would be in excess of that amount.

    0
    February 16, 2017
  5. Robert Paul Leitao said:

    As the recent all-time highs evidence, Apple’s biggest and best acquisition has been Apple. Through the recent December quarter, under the company’s massive share repurchase plan, the fully diluted share count has been reduced by roughly 20% in just over four years.

    Why should Apple pay a premium for a company such as Netflix, which is already trading at an astronomical price-earnings multiple, when Apple can invest in Apple by reducing the fully diluted share count and is trading at around 16 times trailing 12-month earnings?

    Each share repurchased has its value distributed to the remaining shares outstanding.

    5
    February 17, 2017
  6. Tom Wyrick said:

    Apple could invest $50-$100 billion in Berkshire Hathaway. Then its cash would be well-managed and diversified, and it could easily accumulate ownership in tech companies with good future prospects, without forcing them into shotgun mergers with Apple.

    Buffett is a master at identifying synergies between companies in different industries. If Apple and Berkshire were permanently linked, Buffett would likely arrange strategic partnerships between Apple and various Berkshire-owned companies — which number in the dozens.

    0
    February 17, 2017

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