INTERVIEW
HORACE DEDIU > APPLE COULD BUY THE ENTIRE MOBILE INDUSTRY INTERVIEW BY MARKIN ABRAS
new industries (i.e., growth outside their core) rather than opportunistic bargain hunting. So price alone is not a determinant factor.
Often buyers overpay for assets rather than benefit from turnarounds. There are other buyout funds that buy bargains (also known as distressed assets) and try to turn them around. These are usually private equity funds specializing in this asset class and never large companies. The reason is that the approval process for M&A inside large companies is very demanding. Managers are expected to present opportunities as synergies and clear value propositions, not "gem in the rough" or "dogs with fleas". The approval process is so tough that if there is any hint of distress, the due diligence process would kill the idea.
Did you know that Apple has enough capital to buy out the entire mobile phone industry? That sounds crazy, but given the current valuations and market value of Apple's competition, it would not be difficult for Apple to acquire every phone vendor except for Samsung with cash alone!
As the mobile market matures, will Apple start buying out its competitors in order to keep its share-holders happy? To answer this complex question,
publisher Markin Abras spoke with Apple analyst Horace Dediu.
Markin Abras > Will mergers and acquisitions (M&A) and corporate restructuring be part of Apple's future business model?
Horace Dediu > The mobile computing phenomenon has been a study in contrasts. On the one hand there is great growth and vast wealth created as consumption of computing in mobile contexts booms. On the other, there has been a valuation collapse in many vendors who supplied equipment and devices to the telecom industry. While Apple has grown, Nokia, RIM, LG and Motorola have seen shareholder value vanish.
I suggested as much in a post which noted that Apple's cash is nearly equal to the market caps of the incumbent phone vendors.
The point of the post was to highlight the difference in wealth creation vs. wealth destruction that is happening as a disruption sweeps through the industry. But many have taken the idea to heart and asked if such disparities in valuations would induce acquisitions and whether there would be consolidation in the industry.
Acquisitions rarely happen because assets are suddenly cheap. The underlying assumption would be that acquirer strategies include "looking for bargains." From my experience acquisitions by larger companies are driven by some strategic plan to enter
So from that operational point of view, struggling companies don't make good M&A targets. But from the point of view of industry dynamics and value chain evolution, the story is a little different.
Consolidation often happens when an industry begins to contract. This is because there is excess capacity and some value can be squeezed by eliminating it and reducing shared overhead. This did actually happen in the phone market in Japan where vendors consolidated last summer from 6 to 2 or 3 That may be seen as an exception because the "Galapagos Syndrome" Japanese market was unique and insular enough that local vendors held huge share and were too numerous once the growth in feature phones peaked. The entry of smart (app) phones shifted growth to a new group of companies and new economics of reduced portfolios.
However, Japan, even though exceptional, may be a harbinger of what may happen to the voice phone vendors. As the low end market peaks, there will be a natural tendency toward consolidation. LG may become a target and perhaps Motorola and Sony Ericsson. These brands still have value but their smartphone businesses are undifferentiated and their voice- oriented businesses will have excess capacity. So there will be some logic to seeing consolidation.
However, none of these scenarios suggest that Apple would have any benefit from acquiring assets from incumbent phone vendors. This is a tale of two markets: voice- and data-oriented; or alternatively, phoning vs. mobile computing. The markets are asymmetric and knowledge of one does not benefit much the other. Even the profit models are different where in one you're selling essentially planned obsolescence and in the other platforms.
So the logic of Apple buying legacy incumbent phone businesses does not make much sense, but the consolidation of those vendors either through merger or through a pooling of interests does make quite a lot of sense.
For more info visit asymco.com.
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