2 Potential Buyout Targets for Apple

Ishfaque is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

As Apple (NASDAQ: AAPL) faces higher levels of competition, the company's need for newer avenues of growth are crucial. Apple hasn't unveiled a new game-changing product, but did lay out a new OS and newer revenue outlets from the services side. The slower demand for its iPhone line along with a lack of visibility in the product pipeline has kept investors on the side-lines. And the company should seek out inorganic revenue growth using M&A.

Apple should acquire a content distributor

It is widely expected that Apple will come out with a solid product in the last quarter of 2013, or early 2014. However, in the meantime, Apple's stock is getting hammered in spite of announcing record share repurchases along with an increase in the cash dividend.  Apple's cash position in the last quarter stood at more than $144.6 billion, and then the company went out and issued $17 billion in debt capital markets for its massive capital allocation program.  Apple's cash hoard in the next quarter is almost certainly likely to exceed $160 billion post debt issuance, even after factoring in dividend payments and sizable share repurchases. 

With a ballooning cash position along with solid momentum in the services business, Apple should go out and acquire a content streaming distributor: video and/or audio. This will aid in calming down the nerve of investors and simultaneously ramp the monetization of its iTunes and services business which boasts of a run-rate in excess of $16 billion.  

1. Pandora Media

The increasingly popular Pandora (NYSE: P) has great characteristics that make it a very viable candidate for a buyout. The company is seeing large increases in user traffic and listener hours, and the company's bottom line continues to be in the red. And with Pandora's market cap close to all-time highs and close to $3.2 billion, the company's management might be tempted to sell if a lucrative offer comes along. 

The Internet radio leader has more than 200 million registered users on its platform. And Pandora has been growing across the board, with more than 70.1 million active users which is a Y/Y growth of 35%. Pandora's top-line revenues grew 55% on a Y/Y basis to $125.5 million the in the last quarter as well. Pandora now has largest music streaming subscriber base in the U.S. And it has in excess of 2.5 million users for the Pandora One paid service. And users are tuning in on mobile and on other devices, the company's total listener hours grew 35% Y/Y to 4.18 billion in the last quarter. The company's net losses for the last quarter stood at $28.5 million and haven’t seen dramatic improvements for a while now. 

Apple launched its own music streaming service, iTunes Radio, and the competition between the two is expected to increase. But if Apple is willing to open its wallet, the companies can realize a lot of synergies from their respective services. Apple has more than 575 million registered users on iTunes and Pandora has more than 200 million. 

Pandora is trading at a price/sales ratio of 6.6 and EV/sales of roughly 5.4. Pandora's revenue per active user at the end of last quarter stood at $6.73. And Apple can make a lucrative offer from those valuation statistics by offering a sizable premium of 30% to Pandora to make it a part of Apple. In addition, a joint entity would have much higher bargaining leverage with music studios and other artists, which will provide incremental benefits for the both the companies. 

2. Hulu

Rapidly growing online video platform Hulu is gaining across all of its business metrics. The company now has more than 70,000 titles in its content library, and is rapidly adding more original content and exclusive shows for its users. Hulu is owned by three media giants, including Disney, Comcast and News Corp (NASDAQ: NWSA). Hulu has an edge in signing relatively more lucrative content licenses due to the position of its parent companies. 

Hulu currently utilizes a freemium business model which enables the company to monetize users by showing video ads, and users who want enhanced services pay a monthly subscription fee of $7.99 for Hulu Plus. Hulu is competing with the other big names in the space, including Netflix and Amazon, to gain more user traffic and paid subscribers as well. Hulu earned more than $695 million in total revenues in 2012 and now has more than 4 million paid subscribers on Hulu Plus. 

The rising video platform's owners, News Corp's Fox and Disney's ABC business units, are in discussions with regards to the company's future, and they couldn't previously reach mutual ground over Hulu's business model. Hulu had received bids from a former top executive of News Corp., Peter Chernin, but the bid was considered to be too low, according to The Wall Street Journal.

Hulu bought back shares from a previous owner for approximately $2 billion, and Apple can pay a sizable premium up to 30% to that precedent transaction and gain a lot of upside. Apple's streaming device, Apple TV, provides entertainment choices for consumers that enable streaming videos from Hulu and from others like Netflix and YouTube. And with numerous investors widely expecting an iTV from the iPhone maker, the company can gain a lot of strategic upside from owning a rapidly growing Internet property like Hulu. 

The bottom line

Many market participants have stated that Apple should acquire rapidly growing scalable businesses like Netflix, Hulu and Pandora, and rightly so. While Netflix has increased its market value dramatically, and will be a difficult acquisition for Apple, Hulu clearly represents the next best thing. With Apple's total cash position set to rise, the company can easily acquire these two companies and generate new users for its other businesses while growing and diversifying its revenue base.

Apple can gain a strong presence by having a footing in over-the-top media consumption and mobile entertainment. Apple can earn a lot more from video advertisements and radio advertisements by acquiring these two companies, and its gigantic cash position won't even take a material hit either.

In the past, most tech companies specialized in particular niches, but recently, the largest players have gotten into a trillion-dollar turf battle with the future of the entire industry at stake. Find out which company we believe will emerge victorious in this all-out corporate war by reading the Fool's latest research report. It's absolutely free, so get your copy today by clicking right here.

Ishfaque Faruk has no position in any stocks mentioned. The Motley Fool recommends Apple and Pandora Media. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus