- Forbes recently published an article stating that Apple should buyout IBM.
- The combined organization would be large, but there's limited strategic value in merging the two companies.
- Even if the deal could generate some accretion, creating long-term value out of the combined business would be extremely difficult, as the two companies really aren't compatible.
- A Microsoft and IBM merger would make more sense from the context of economics, as it would lower competition, and create a central market place for enterprise apps & computing.
- Even if Apple's cash pile were to match the size of IBM's market cap, share buybacks and investing in organic growth would be a more effective use of cash.
Forbes recently published an article by Peter Cohan titled “three reasons Apple (NASDAQ:AAPL) should buy IBM (NYSE:IBM).” Now, after looking over the comments made by the author, I have to admit, I’m just not convinced with his reasoning, even though the idea is novel. Peter Cohan believes that an acquisition of IBM is feasible based on the numbers, and while I don’t debate that, I just believe that an acquisition of this scale would be risky. Not to mention, Apple is known to be very conservative with its acquisitions. Apple tends to favor smaller deals. This is likely to continue, as it’s easier for Apple to integrate small business units into its big company.
Peter Cohan goes on to mention that Tim Cook was a former employee of IBM, and that IBM could use Apple’s execution to generate meaningful growth in various markets in the cloud. The potential accretion from such a deal would come from higher free cash flow after reducing various overlapping costs. But again, this type of deal would benefit IBM shareholders more so than Apple shareholders, as Apple doesn’t really need IBM.
Apple makes plenty of profit from its application ecosystem, and it’s likely that the app ecosystem can exist without IBM. Recently, IBM and Apple formed a partnership to deliver various IBM applications over iPad devices. The result? Nothing. The Apple iPad segment reported declining rates of growth, as the partnership between Apple and IBM failed to deliver the intended results of enterprise adoption. Sure, enterprise customers are a bigger component of iPad sales, but it wasn’t enough to offset the shrinking tablet market, which rippled across all the major OEMs. So we already know what happens when these two big technology companies work together – nothing.
The overlap between enterprise and consumer application ecosystems is going to be tough to bridge.
While Apple’s app store has some useful applications, it’s not always geared towards productivity. IBM’s product suite of software is targeted at very narrow use cases in which efficiencies can be generated due to software and large-scale data analytics. IBM tends to bundle its various enterprise hardware and software solutions together, so IBM isn’t really lacking an ecosystem of its own. Instead, it faces structural challenges as a result of its over-dependence on middleware pertaining to its UNIX operating system.
The company is aggressively diversifying itself away from middle ware licenses. Legacy data center systems tend to run on Unix, which is one of the older enterprise operating systems, originally developed out of AT&T’s bell labs in the 1970s. Transitioning the system architecture to a different OS or onto hybrid cloud can be very expensive. IBM itself has a niche, and while a niche is okay there’s no denying that IBM’s middleware business is shrinking in comparison to the broader growth in public and hybrid cloud. IBM has yet to develop a multi-purpose business application that appeals to a broad base of consumers. Microsoft, Salesforce, and Adobe have figured out a way to combine enterprise software with large-scale consumer adoption. Therefore, the strategic value of owning IBM just isn’t there for Apple.
An IBM and Apple merger would create a combined entity which would generate $300 billion+ in revenue, and over $70 billion in profit by the end of the current fiscal year. IBM has a price to earnings multiple of 11, which makes it cheap. However, earnings growth just hasn’t been there (5-year EPS growth at 4% annualized). The lack of growth is partially driven by market saturation, and the lack of a compelling product roadmap.
IBM still markets and sells systems, and from what I have seen, packaged server hardware is a declining market. This implies that Apple would have to optimize IBM for profitability, and look for ways to create value out of its enormous patent stack. Apple would need to find a better use case for IBM’s free cash flow, and from what I’ve seen, Apple won’t be able to. It will pile up even more cash every year, and while that’s good, It doesn’t answer how Apple will return IBM to growth.
Even if Apple could rationalize the immediate accretion it could create as a result of OpEx leverage, capital returns, and return to growth, a deal of this scale just wouldn’t happen. Maybe, Microsoft (MSFT) should consider a buyout of IBM, and I only say this because IBM and Microsoft compete with each other. If the two were to combine, they can increase pricing, and combine the Windows and IBM enterprise software ecosystem to create new use cases and value for their enterprise customers. The two businesses would be highly compatible, lowering restructuring and integration costs.