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June 25th, 1999

Apple For Sale?, Part I: Forget The Rumors, Look At It From A Wall Street Perspective!

Editorial
by Wes George
June 25th, 1999

On June 9th , Don Crabb wrote a modest article in which he claimed that his sources at Apple mysteriously revealed to him that "Apple was rebuilt in order to be sold". Of course, only the top echelon at Apple could possess such dour information and it’s doubtful that they leak state-secrets to the Mac punditocracy.

Don Crabb shouldn’t need leaks to see the handwriting on the wall. All you need is a calculator, an Internet account and a bit of business savvy.

Apple is a classic buy out target!

As the most undervalued of all the PC manufacturers, Apple’s PE ratio looks positively depression-era compared to her peers. Walt Disney with a market cap of 62 billion could pick up a world class tech house and brand name for pocket change and a song.

There is a ton of circumstantial evidence for Don Crabb’s assertion that Apple was rebuilt to be sold, but you won’t find a single ounce of it on any Mac-friendly web site. For myself, to hear the almost universal disparagement that Don received in the Mac media for his article was a wake-up call.

I feel like there is a vast misunderstanding in the Mac oriented punditocracy about what the issues really are here. There is a head in the sand tendency. Why doesn't the Mac press want to see things in any other light than bondi blue? So much for thinking different.

Let’s think metaphorically about Apple's situation for a moment, shall we?

It's like that of an army that has just made a solid but small beachhead in enemy held territory. (The iMac invasion on the shores of Wintel land.) You can't just sit on the beach and let the enemy have time to recoup from your surprise landing.

No, you must seize the moment and forge inland, take casualties, call up reinforcements, put every ounce of your being into getting off that beach and moving inland before you get pushed back into the sea.

But what is Apple doing? They're spreading beach umbrellas and breaking out the suntan lotion! As if the beach is all they really wanted. Do they know something that we don’t?

In fact, Apple is a textbook example of a "sweetened" business operation.

This is really common stuff on Wall Street. As the loyal Mac faithful, we find it hard to believe that our whole religion could be sold overnight to the highest bidder! If Apple were less of an ideology and more of a business (which, hello, in reality, it is!) then the Mac-centric commentators would have been all over this one long ago. Our faith has blinded us to a difficult reality.

Wake up and smell the coffee

First, Jobs has kept the gross margins so high that he has impeded market share growth. Apple's gross margins are the highest in the industry, and that’s an unforgivable sin for a corporation trying to capture market share. (Must forge inland to expand the beachhead.)

Apple should be selling new iMacs for 900 bucks, and building, or contracting out, massive new factory capacity but they aren't. The latest round of outsourcing to Korea is not large enough. A strange tactic for a company who's total future hinges on capturing a significant increase in market share. (Must call up reinforcements.)

In fact, a little noticed detail about Apple is that her market share is now doomed to decrease in the next year. Even if the consumer portable is a big hit, and iMacs keep selling like hotcakes, Apple doesn't have the capacity to keep up with the ever-expanding, worldwide, PC marketplace. (We will be pushed back into the sea!)

Within half a year, Apple will have to sell +1,000,000 units a quarter just to maintain their market share. Why doesn’t someone point this out? What will software developers and Wall Street make of Apple's decline in market share from 4.5% to perhaps 3.0% by 2001? (Dunkirk, revisited.)

Wall Street doesn't give a damn. The analysts see the beautiful profits rolling in and even a buy-out will make investors pocketbooks swell. By typical buyout algorithms, Apple might sell today for between 65 and 75 bucks per share. Hey, isn't that Solomon Smith's target price for Apple? What a coincidence!

If Jobs were serious about fighting an extended total war with the Wintel enemy, Apple would not be so under-valued. All that cash Apple is sitting on would be long gone into increasing factory capacity, and there would be huge production outsourcing deals going down in Asia and Mexico for more Macs.

The profit margin would be razor slim. A massive, costly, even brutal ad campaign would be going on, like the one I read about comparing PC to dinosaurs and Y2K to the asteroid that wiped them out and left the world free for the mammals (Macs) to populate. Apple ads would be more common than IBM, Intel, and Gateway ads combined.

There's more… Why did Apple clean up its 6% debt on the first day possible? That ‘loan’ didn't have to be liquidated till 2001. Those bucks were sorely needed to fight for more production capacity, more media presence, and more R&D. Instead, Apple chose to increase it’s Moody rating. Perhaps Jobs liquidated it because of that old business maxim: no one ever buys a debt.

Also, notice that when Apple’s poison pill plan expired a few months back the Board of Directors did nothing to replace it. That’s odd behavior for an undervalued corporation that could be the target of an unfriendly take-over.

Why can't Apple go it alone? Do the math. It's a war. Apple has 7 billion bucks and the Wintel foe is worth over a trillion bucks. Go figure. Yes, Apple has taken the Wintel forces by surprise with the iMac and has them temporarily on the run, but I don't see our forces following up their iMac advantage fast enough to hold their ground. Like Gilligan, Apple needs a big buddy.

Four Different Thoughts

The above is, of course, just one guy’s gut level speculations on the subject. Sometimes referred to as bullsh*t by the less charitable. There is much more that has yet to be revealed on this topic. Below are four final but different thoughts that I offer the Mac faithful to consider.

1. It's not a zero-sum game. If Apple sells out it does not mean Apple has been vanquished, or that the dream is obliterated. The torch will merely be passed to a stronger player. The dream must be able to live past a single man’s vision or it isn't worth keeping in the first place.

2. Apple is one of the world's greatest brand names up there with Coca-Cola, Nike, Harley Davidson, etc. If someone buys Apple they will not liquidate the company, but maintain it as an entirely discreet organization. The Apple Corporation’s unique and laid back culture need not be destroyed. In fact, maintaining it will be in the best interest of the purchaser. Nothing will change from the end users point of view, except that consumers can be sure of Apple's long term future for the first time in many years.

3. Steve Jobs will do what is in the best interest for his baby and if that best interest includes some sort of merger, strategic alliance, or even sale of Apple to a well-muscled player, then so be it. Get used to it. It is almost certain that something dramatic is going to have to happen to secure Apple's long term future, the sooner the better.

4. Apple's future is as opaque as the darkest glass.

Your comments are welcomed.

Back to The Mac Observer For More Mac News!


Wes George writes about the financial side of being a Mac nut. Wes has followed Apple's finances for the last 7 years and comes to The Mac Observer every Tuesday to tell all about his opinions. He is, in his own words, "inordinately fond of money." If you would like to write Wes, make it nice. Someday you might own a company that has something to do with Apple, and Wes will probably still be writing for The Mac Observer...... On the other hand, Mr. George is known to love a rousing, hair-raising debate, so send him your worst!

Disclaimer: This column is for informational and entertainment purposes. While Mr. George may be sage indeed, his writings can not be construed as a solicitation to buy, nor an offering to sell any particular stock. As with any trading in the financial markets, you must use your own judgment to make the best trades that you can. Neither The Mac Observer nor Wes George may be held accountable for trading advice.



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