Quick Thoughts: Who’s Buyin’ Who?

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SEE LAST PAGE OF THIS REPORT Paul Sagawa / Tejas Raut Dessai

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January 4, 2018

Quick Thoughts: Who’s Buyin’ Who?

The new year and the expected foreign cash repatriation spending spree has the sell-side thinking about M&A. We noticed a few TMT fantasy hook-ups creating a bit of buzz and thought we might play the game too. Our rules: We are going to be realistic – in no scenario would AAPL spend out its full cash hoard on media acquisitions. We will start by giving our odds that the company in question would do a deal worth $10B or more. We will pay attention to the cultural and philosophical core of each would-be buyer – AMZN acquiring Uber would face significant integration challenges. We will tie the proposed deals to our perspective on the actual strategy of each company, rather than our view on what that strategy should be. With that, here goes our take on the possible targets for the big 5:

  1. AAPL (Likelihood of a big deal? 5%) – Recent analyst notes have Tim Cook writing a $125B check for NFLX, or even $200B for DIS. If this happens, the AAPL board should check to see if their CEO had been replaced by some sort of Bizarro World Tim Cook. The $3B deal for Beats in 2014 remains the biggest acquisition AAPL has ever made, and if Cook is going to top that, it won’t be by a factor of 40x. AAPL just wants more special things to make its iOS users feel the warm fuzzies – it does not want to be a cross-platform content provider. This is why AAPL didn’t buy Spotify either, a few years ago, while it was still on the value rack. If we had to pick a purchase for AAPL, we’ll go with something to juice the Alternative Reality initiative – say, Magic Leap or Daqri, neither of which would top the $10B threshold. If it must be big, then let’s pick Sonos, pre-IPO.
  2. GOOGL (75%) – GOOGL’s ambitions run in many directions, but we think its checkbook will be most likely turned toward enterprise computing. For having the world’s biggest and most sophisticated cloud computing infrastructure, it has not generated real momentum in commercial hosting and its G-Suite productivity apps are barely on MSFT’s competitive radar screen. Last year, GOOGL announced a partnership with CRM – the enterprise software equivalent of chocolate plus peanut butter. We would not be surprised to see GOOGL make the relationship permanent for $90B or so – Marc Benioff could slot right in as head of a much, much more formidable GOOGL Enterprise. If not CRM, perhaps GOOGL could step in once AVGO whiffs on QCOM – stranger things have happened, it could serve GOOGL’s interests on many fronts and the cultural match is MUCH better than QCOM/AVGO.
  3. MSFT (50%) – Satya Nadella is a bold CEO. The $26B takeout of LNKD came out of left field, but is perfectly understandable in the context of its data, its reach and its enterprise SaaS app. MSFT’s strategy is consolidating enterprise customers to its cloud and using its AI and the usage data from a billion+ users to give enterprises much greater insight into the workings of their organizations. More SaaS would seem in order, preferably best-of-breed apps that expand MSFT’s reach into the corners of its customers. More likely, the deals will be below $10B – we like ZEN – but perhaps something with a security bent, like SPLK, or, in customer service, like NOW, were MSFT has struggled with its own products.
  4. AMZN (10%) – Until the Whole Foods deal, AMZN was almost as reticent as AAPL around acquisitions. Now, the market seems to see Jeff Bezos as some sort of shopaholic adding big-ticket “Recommended For You” items to his corporate cart. We just don’t see JWN or TGT on the wish list – AMZN is doing just fine in general merchandise without the real estate. We expect AMZN to enter pharmacy, but aside from our colleague Dr. Richard Evans’ idea of sub $2B cap specialty distributor DPLO, we don’t see M&A as necessary. If AMZN is going to do a $10B, and we don’t think that it will, it will likely be far outside the box – say, TWTR. AMZN is looking to build an ad business. TWTR is the distant #3 digital ad platform with strong ad tech. AMZN is looking to build live video, and so is TWTR. TWTR has excellent engineering, an AI presence, and a reasonable price. If Bezos decides it’s strategic, he won’t hesitate.
  5. FB (20%) – Mark Zuckerberg sat on his wallet in 2017 while the company continued to digest Oculus and WhatsApp, and it’s not clear what is going to get him to pull it out again. The company still seems doggedly focused on its core business of adding to its nearly 2 billion users, while pushing more and more kinds of ads at them. It is unlikely that antitrust regulators, particularly in the EU, would ever approve another social networking deal, so TWTR, Pinterest, SNAP and others are likely off the table, even if FB wanted to buy them, which they probably don’t. Oculus could be a clue – it has not done well and risks irrelevancy with the world shifting attention to AR rather than VR. Could Magic Leap be on its radar screen? Perhaps gaming content – ATVI or TTWO? Or maybe Zuck wants to really make a splash in video – is FB a stealth buyer for NFLX? Thinking about it, there could be some considerable synergies between the two companies – consumer reach, valuable data, cross-marketing, new revenue streams, etc.
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