Photo: Associated Press
NEW YORK (TheStreet ) — Apple(AAPL) currently has a $315 billion market capitalisation, with $60 billion in cash on its balance sheet. Analysts speculate it will use the money to start paying a dividend, do stock buybacks, or do an acquisition.There is one company that should be on the top of Apple’s shopping list: Facebook — and Apple should be willing to spend up to $100 billion to get it.
Last October, Steve Jobs made an unexpected appearance during the quarterly analysts’ call and was asked his intentions for the cash pile.
He responded: “We strongly believe that one or more very strategic opportunities may come along that we’re in a unique position to take advantage of because of our strong cash position.” In other words, they will only use this money for acquisitions.
Until now, Apple has only made small, sub-$100 million acquisitions like music streaming service Lala. A year ago, it bought mobile advertising company Quattro Wireless for $300 million. Although there were rumours six months ago that it might make a play for chip-maker ARM Holdings(ARMH), Apple has never done a $1 billion acquisition.
But, we shouldn’t mistake inaction for inevitability. What could a “very strategic” opportunity be for Apple to acquire? A chip-maker would help them increase their gross margins, but it isn’t a game-changer.
In my view, the only company out there that could represent a huge increase in the opportunity set in front of Apple for the next 10 years is Facebook.
Interestingly, a week before Jobs’ appearance on the analyst call last year, the LA Times reported that Jobs invited Facebook CEO Mark Zuckerberg to dinner at his house. The topic of conversation reportedly centered on Apple’s new social networking service called Ping. Although the service was initially designed to allow iTunes users to share their song preferences with their Facebook friends, Jobs pulled the plug on this after Facebook tried to impose “onerous terms” on Apple.
Enabling Facebook to connect with Ping could certainly be lucrative for Apple. One media executive told me recently their traffic went up 30% immediately when they enabled this feature to their site. However, this alone isn’t sufficient grounds for justifying a Facebook acquisition.
Facebook and Apple share a common enemy: Google(GOOG). Against both, Google is able to leverage its core AdWords text advertising business to invest extraordinary resources back into iPhone/iPad and Facebook competitive products.
But Google’s supremacy thanks to AdWords and search looks far less secure today than it did two years ago. In fact, if you believe Jobs, the shift from users consuming information from a PC to mobile devices like iPhone and iPad is a potentially destabilizing event for Google. Last June, Jobs said: “We discovered something — people are going into apps. They’re not just going onto to websites. And people love apps. This is an entirely new thing — they aren’t using search, they’re using apps like Yelp.”
And guess which app is the most popular on any mobile device? Facebook. By a long shot.
So, the question is really: how will advertisers reach users five years from now, if not through Google text or display ads? Apple will know intimate information about how we interact with our data, apps, and iTunes content. They will also know how we use our mobile devices for payments. But Facebook will likely be able to deliver an ad to the most tailored user of any company in the world.
Put the two together and you have a potential Google killer.
Facebook — and its investors — believe that they could do an IPO tomorrow and get a quick $70 billion valuation (making good money on their recent private valuation which put the company’s value at $50 billion). So, Apple will have to pay up to start poking. The final price tag would likely need to be $100 billion to convince Facebook’s owners to take the money.
But there’s a price limit because, at those levels, only Apple could do this deal. Google would likely view that price tag as too rich. And why would Zuckerberg want to share power with the Google co-founders?
There are two reasons why Zuckerberg would agree to a buyout from Apple when he’s already turned down Yahoo! (YHOO), Google, and Microsoft(MSFT). The first is to help ensure Facebook gets access to the Chinese market where it’s currently blocked. Zuckerberg recently visited China on his year end vacation to visit Baidu(BIDU) and Sina (SINA). He’s studying Mandarin an hour each day. He’s unlikely to break into the market on his own, but help from Apple — which is even more of a cult there than in the U.S. — could help it happen.
The second reason is the enlarged potential opportunity set.
You know what’s cooler than a million dollars? A trillion dollars.
A combined Apple and Facebook would unite the best products for the next decade with the most popular software platform for sharing information which brings advertisers to exactly the consumers they want to reach.
Tim Cook isn’t going anywhere as Apple’s leader in the short-term, but Zuckerberg would be setting himself up to be the CEO of what will likely be the world’s first trillion dollar company. That will get your attention.
Eric Jackson held a long position in AAPL, SINA and YHOO at the time of publication.