Merrill Lynch On Universal Rumor: Bad Idea For Apple

by , 2:30 PM EDT, April 11th, 2003

As word leaks from a Los Angeles Times article that Apple is interested in buying Universal Music Group from Vivendi Universal for between $5 billion and $6 billion, analysts are beginning to weigh in whether or not such a move would be good for Apple. The first such analysis comes from Michael Hillmeyer at Merrill Lynch, who sees the possible purchase as a bad move.

Here are excerpts from Hillmeyer's report released Friday to clients and media:

While the reported talks between Apple CEO Steve Jobs and Vivendi are only speculations at this time, Apple shares are trading down sharply (down 7% today).

In our opinion, the purchase of a major music company such as Universal would not make strategic sense for Apple.

Apple has reportedly been working on an online music distribution service that would greatly simplify the (legal) sale and download of music over the Internet. While it can be argued that Apple could make some incremental revenue from the online sale of music, the company would not need to own a music company in order to do so.

In fact, there do not appear to be any synergies between a music company and a PC company, even one as innovative as Apple. We do not see the advantage of technology companies owning both a platform and content (very few own both), and believe companies are run best if they can focus on one or the other.

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We do not know if there is any truth to these speculations although we consider the proposed combination unlikely. But if the speculations were true, we believe that Apple shares would trade down significantly, even from current levels.

For the past several years, Apple has been unable to increase its market share in PCs, and the company has recently been running at an operating loss. In our opinion, management's first priority should be to fix these problems.

We maintain our Sell rating on Apple shares and believe that the stock remains expensive on P/E and P/S ratios. We think that potential reports of weakness in Apple's primary markets (consumer, education, design professionals) over the next few months could negatively impact the stock.

Michael Hillmeyer issued comments earlier this week that laid out his Sell recommendation on AAPL. In those comments, the analyst also said that Apple's only hope was to move Mac OS X to Intel's line of processors.

As of this writing, AAPL is trading at 13.26, down 1.11 (-7.72%), on very strong volume of 14,705,409 shares trading hands.

The Mac Observer Spin:

The problem with Michael Hillmeyer is that he has little understanding of the Mac platform. His blithe suggestions that Apple move to Intel, for instance, reflect clear ignorance on what such a move would require, what its ramifications would be within the industry, and what kind of effect such a move would have on Mac developers and users alike. In addition, he consistently fails to give any credit at all for Apple's enormous cash holdings, and the effect those holdings have on Apple's stock price. With such willful ignorance about the rest of Apple's business, we find it difficult to understand why we should give any credence to his thoughts on the rumored purchase of Universal.