This Apple Buyout Makes a Little Sense


Pondering what Apple can or should do with all that cash it's sitting on is a sport in itself these days. After all, there's not a lot that $121 billion can't buy. Let's look at the latest Apple acquisition rumor and see if it makes any bit of sense.

A match made in...?
Apple set its mapping plans into motion many years ago. Unfortunately, even after all that time and money, the new service still wasn't quite ready for prime time and Apple Maps has tarnished the company's reputation.

One of Apple's partners for mapping data is TomTom . Data was always the key piece of the mapping puzzle that would be the hardest to substitute when the Mac maker ditched Google , but TomTom was up for the task. That's why Rabobank analyst Hans Slob thinks that Apple should swoop in and pick up TomTom.

Slob pegs the odds of such a move at 30%, and thinks that Apple's offer could reach as high as 10 euros (approximately $13) per share. Following the speculation, TomTom soared up to 4.12 euros (approximately $5.50) in trading in Amsterdam. That means the high end of Slob's estimates still represents substantial upside even after the jump.

The analyst figures that TomTom needs cash and Apple needs mapping expertise, so a hookup could be a match made in heaven. In that sense, the possibility makes a little bit of sense conceptually. But that's about it, since it makes no sense strategically or financially.

Does it fit the bill?
At current prices, TomTom is valued at around $1.1 billion. At 10 euros per share, that figure climbs all the way up to roughly $2.9 billion. That valuation is already out of Apple's typical acquisition range, which typically tops out around $500 million.

Apple has a very specific acquisition strategy. The company typically looks for small acquisitions that include highly specialized technology that it can integrate into its future products. Think about the chip shops P.A. Semi and Intrinsity for $278 million and $121 million, respectively. There was Siri for $200 million or Quattro Wireless for $275 million. Don't forget about AuthenTec for $356 million just this year.

Growing revenue has never been the goal of an Apple acquisition. In fact, Apple usually scales down the business operations of acquisitions as it focuses on the parts it wants, which is another reason why it goes for smaller companies, since their revenues are rounding errors within Apple's consolidated results and no one would notice their absence.

TomTom's full-year guidance is targeting $1.4 billion in revenue for 2012. TomTom's business has four operating divisions, including partnerships with automakers as well as the stand-alone GPS units it still sells. Hardware sales were 62% of sales last quarter. These aren't businesses that Apple wants to buy and then shutter.

It may be true that TomTom could use the money, but that's hardly Apple's problem. For example, operating cash flow was down 29% last quarter and the Dutch company has about $179 million in cash and equivalents.

Stop me if you've heard this one before
These are all the same reasons why it never would have made sense for Apple to acquire Nuance Communications . Speculation swirled a couple years back when Apple co-founder Steve Wozniak, who hasn't been meaningfully involved in Apple affairs in many years, incorrectly said Apple had bought the voice specialist. That sent Nuance shares to multiyear highs at the time, only to have Wozniak backtrack for misspeaking.

Nuance was a similar situation. The company is a technology partner for Apple, providing voice recognition services, but again would have cost Apple several billion dollars for a company already involved in many other areas where Apple has no interest, like medical transcription. Why buy when Apple can get what it needs through licensing and strategic partnerships?

TomTom is but one of many partners Apple is tapping for mapping data. Investors can even look through a list of them right here. That includes companies like DigitalGlobe for satellite imagery data, CoreLogic for property parcel data, and Yelp for reviews, among many others.

Just because Apple maps faces legitimate challenges doesn't mean the company is going to go out and start buying these data partners. DigitalGlobe is a $1.2 billion company and should do about $405 million in sales this year. Yelp would already be a stretch before you consider its $1.2 billion valuation at 10 times sales. Besides, Apple has accepted it's not great at social, so it partners with companies like Facebook and Yelp for the social aspects.

Sorry, TomTom investors. Apple's not buying you.

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