Who's Apple Going to Buy Next?

Applestore Hk

By: R. Scott Raynovich

It's the grand sweepstakes of M&A speculations, which seems to have revved up since Apple's last earnings release on May 2: Who would Apple (AAPL) buy and why? Some high-profile candidates that have been mentioned include Disney (DIS), Netflix (NFLX), and Tesla (TSLA).

Speculation is rife because Apple has about $240 billion on its balance sheet -- and that cash is piling up every quarter at the rate of about $10 billion to $25 billion per quarter. Nice problem to have, eh? Most of this money is held overseas. Hence the great interest in potential tax repatriation legislation.

This cash stash has generated a steady stream of acquisition rumors and speculations. Apple could buy just about everybody -- including an NFL Football team -- as Paul La Monica of CNNMoney writes. In addition to the high-profile targets Disney and Tesla, some of the candidates have included Adobe (ADBE), GoPro (GPRO), and Box (BOX). Or, maybe it would want to accelerate its self-driving car programs in a bid to compete agains Tesla -- and it could just buy all three of the big-three automakers -- GM (GM), Ford (F), and Fiat Chrysler for $110 million, and have $146 billion in cash leftover, as La Monica points out.

Of course, Apple is not going to do that. Historically, it is a very conservative acquirer and it has always focused on small strategic deals, not big deals. The most high-profile deal it has ever done is when it bought headphone maker Beats for $3 billion -- and, think about it, that is not even that big a deal.

CNBC has its own bit of speculation. That piece cites Citi analyst Jim Suva's list of seven companies Apple could buy, including digital video company Hulu and gaming companies Activision, Electronic Arts, and Take Two -- in addition to the previously cited Netflix, Disney, and Tesla.

Noting that the Apple guessing game has become popular among journalists and Wall Street analysts (and now Futuriom, as well), UBS analyst Steven Milunovich sent out a note today saying everybody is wrong.

"We don't see the point of many speculated deals," wrote Milunovich. "Our view is that the probability of mega-mergers is low as it should be. Cook has said he is not averse to a large deal, but we think it would need to leapfrog Apple ahead in an area of interest, such as transportation, A/R, health, home automation, and perhaps content. The majority of what has been proposed doesn't fit, in our view."

Milunovich thinks Apple is likely to make an acquisition only if it results in a better product and customer experience, not to produce better financial results with its cash.

This is a fair point. Some of the largest deals seem like a stretch. Companies like Tesla or Netflix are rich companies and Apple would have to overpay on already premium valuations.

One company that hasn't come up much that I think about all the time: Fiit (FIT). There are a ton of Fitbits -- more of them than Apple Watches, it seems. When I see a Fitbit, I think, "That's a good product," while my own Apple Watch gathers dust on my desk. Fitbit has a lot of market traction, though it has stumbled lately. The company has a very manageable valuation at $1.4 billion. It seems as if the Apple Watch has disappointed and that Apple should consider adding momentum to its device strategy by buying something with a large footprint. This would be similar in size and scope to the Beats acquisition.

Whatever deal comes next, we can be sure the speculation will continue until something happens.