Every year Apple’s massive nearly $260 billion cash pile swells by billions of dollars and investors are excited to watch what Apple will do with all this money.
Apple’s cash hoard, 90% of which is not held in the US, is greater than the whole market value of Walmart or Procter & Gamble according to Wall Street Journal. With all this cash, Apple could, for example, buy Finland ($232.4 billion GDP), give every person in the US $778, buy 2,500 of Trump’s private Boeing 747 or buy a $2.2m yacht for every member of its staff.
According to CNBC Apple has pledged it would double its services revenue by 2020. Earlier this month, the research arm of the investment bank Citi published a report on potential merger and acquisition targets for Apple with Netflix topping the list. Likelihood of Apple acquiring Netflix is 40%, while the acquisition of Tesla is assessed at only 5%.
Since Apple wants to invest its cash and increase its services revenues, acquiring Netflix and merging it with its App Store seems like a reasonable idea. As we explained in this article, firms are looking to create value when undertaking M&A. Additional value stems from synergy which is created when firms merge. In corporate finance theory, a firm can increase its revenues, decrease costs, strengthen future growth or change its capital structure by participating in M&A and so create value.
If Apple buys Netflix, it can create value.
First, merging its iTunes Store with Netflix could create a huge entertainment platform – everything from brand new songs to Netflix movies would be available in one place. This seems to be appealing and more convenient than using two separate providers – iTunes and Netflix. Ability to find different types of favourite entertainment in one place could lead to an increase in the customer base and ultimately a revenue growth.
Second, Apple would gain a greater say and market power in the entertainment industry allowing it to bargain for better deals and so decreasing its costs.
Third, Apple would gain access to over 80 million Netflix subscribers and would be able to attract Netflix users who are not Apple’s customers yet, which would again increase revenues.
Finally, Netflix’s engineering and cloud teams which are amongst the best in the business, would add the vital Internet and cloud DNA to Apple and so help accelerate its “services” ambitions.