Go Shopping, Apple Inc. (AAPL)!

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In 2012, Apple Inc. (NASDAQ:AAPL) added $38.7 billion to its already sizable pile of cash.  This is more than the annual GDP of many small countries, including Serbia, Panama, and Bahrain. Although some have urged Apple Inc. (NASDAQ:AAPL) to return more cash to investors, Apple should use most of its cash to bolster its competitiveness, but finding productive ways to spend the cash is becoming difficult. It’s time to think big, as in major acquisition big.

Apple Inc. (NASDAQ:AAPL)Tim Cook’s message at Goldman Sachs

Little noticed by the tech media has been Tim Cook’s new found willingness to consider a “major acquisition,” something that would have been unthinkable in the Jobs era. At the Goldman Sachs Technology and Internet Conference last week, Cook said:

“In terms of large acquisitions, we have looked at large companies.  In each case . . . it didn’t pass our tests.”

“Would we look again?  I’m sure we will.  Is there a reason why we couldn’t do that? No.  I think we have the management talent and depth to do it.”

“We want to make great products. That’s what we’re about.  If a large company could help us do that even better, then that would be of interest.”

Why an acquisition would be a good thing

I see a large acquisition as having the following potential benefits:

Becoming more vertically integrated. The acquisition of a major hardware company would almost certainly have the effect of making Apple Inc. (NASDAQ:AAPL) more vertically integrated by re-incorporating more hardware manufacturing into the company. Apple’s chief rival in smart phone manufacturing is Samsung, one of the most vertically integrated electronics manufacturers on the planet. Samsung produces everything from ICs to LCDs.  Samsung designs their own ARM-based SOCs (systems on chip) and manufactures them in their own silicon foundry.  Apple Inc. (NASDAQ:AAPL) also hires Samsung to build its Apple Inc. (NASDAQ:AAPL) designed SOCs for the iPhones and iPads.

Is what’s good for Samsung necessarily good for Apple?  This remains to be proven, but in-sourcing does offer potential advantages in product development time and responsiveness to market changes.  It also means that profit that would have gone to the supplier goes instead to Apple.

Broadening the product portfolio. Apple has historically focused on making a few “insanely great” products.  This has worked well for Apple, but also has led to the belief that Apple can’t prosper without new breakthrough products. In fact, Apple was a little too dependent on breakthrough products in the Jobs era, and one way to reduce that dependency is simply to offer a wider variety of products.  Why not the proverbial Apple Television or even an Apple AV receiver?  Given how beautifully Apple products work together, Apple could set its sights on conquering the living room rather than merely occupying a tiny piece of it with Apple TV.

Tests? What tests?

It’s not hard to imagine the gist of the tests Cook mentioned.  First and foremost, the company would have to want to be bought.  Corporate raiding isn’t Apple’s style, and anyway, a hostile takeover of even an insignificant company would mean instant ostracism in the Valley, where no one wants to be branded “evil.”

And herein lies the chief difficulty, since it’s not easy finding a large company that wants to be bought that’s actually worth buying.  Which brings us to what is certainly an important test: the company has to be profitable, or if not, the unprofitable parts have to be easily jettisoned.  Apple is not a turnaround specialist, and in any case, they don’t want to be bothered.

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