Go Shopping, Apple Inc. (AAPL)!

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.

Given these conditions, here’s my short list of companies that might want to be bought, and that Apple might want to buy:

Adobe Systems Incorporated (NASDAQ:ADBE):  market cap $19.3 billion. Another sign that the influence of Steve Jobs was waning was that Apple executives were willing to say nice things about Adobe last June at WWDC.  Specifically, Phil Schiller gushed about the “great team at Adobe” working on the next Mac version of Photoshop optimized for the Mac Book Pro retina display.  Why would Apple want Adobe?  Well, they happen to be, after Apple and Microsoft, one of the few major software companies still developing for Mac OS, and their product portfolio doesn’t overlap much with Apple’s current offerings.  This would put Apple back in the PC software business, but let’s face it; Adobe could really use Apple’s disciplined approach to software quality control.  Having missed out on the mobile app explosion with the demise of Flash, Adobe’s growth has petered out, with operating income for FY 2012 up only 7% at $1.18 billion.  Apple could re-purpose some of Adobe’s software talent towards Mobile apps with the benefits of enhancing app store revenue and making its mobile ecosystem even more secure.

NVIDIA Corporation (NASDAQ:NVDA):  market cap $8.0 billion.  One hears a lot of loose talk that the graphics card is dead, thanks to on-board graphics on Intel’s Ivy Bridge chips.  What the tech pundits don’t see is that the graphics card has been integrated onto the SOC; and in this role, graphics processors, whether in Intel or ARM based SOCs, are very much alive.  In this application, NVIDIA excels as well.  More relevant for Apple, though, is NVIDIA’s expertise in building ARM processors.  NVIDIA’s new  quad core Tegra 4 represents the absolute state of the art for ARM processors.   Apple currently designs their own dual core ARM processors, but if they wanted to be truly ahead of the pack, buying NVIDIA would put them there.  The discreet graphics chip business could even be spun off if Apple decided it wasn’t worth keeping.  Operating income growth was flat at $648 million for NVIDIA’s most recent fiscal year (ending 1/27/13) with basically flat revenues in NVIDIA’s operating segments except Tegra, which grew 90% y/y in the fiscal fourth quarter.

Both Adobe and NVIDIA are headquartered in Silicon Valley, making the logistics of assimilation a little easier.

Other companies that might be of interest include Marvell Technology Group Ltd. (NASDAQ:MRVL): market cap $5.0 billion, which makes a wide variety of ICs and also dabbles in ARM SOCs, and Imagination Technologies: market cap $2.11 billion, the British firm which designs the graphics co-processors currently found in Apple SOCs.

I believe the right acquisition(s) would do more to restore Apple’s stock price than any form of cash give-back to investors, since it would restore investor confidence in Apple’s basic competitiveness.  Much of that confidence has been eroded by the perception that Apple isn’t up to the challenge posed by both Microsoft and Google.  A bulked-up Apple would do more to soothe investors than a few dollars per share.

The article Go Shopping, Apple! originally appeared on Fool.com and is written by Mark Hibben.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.