Citi lists Netflix, Tesla as potential takeover targets for Apple | Hacker News Reader

Citi lists Netflix, Tesla as potential takeover targets for Apple

reuters.com

59 pointsmrosenfield82 comments

This is so, so dumb. The cash hoard is going to sit overseas where it has until the tax situation changes. Apple will continue to take over companies that help it control its supply chain, which are mostly companies you haven't heard of, and not do any of these big acquisitions that Wall Street loves to speculate about (a month or so ago it was Disney) but that Apple has never done.

> Until the tax situation changes

Do you mean in the country the cash is sitting in?

Because in the article it says:

> With over 90 percent of its cash sitting overseas, a one-time 10 percent repatriation tax would give Apple $220 billion for acquisitions or buybacks, Citigroup analyst Jim Suva said in a note to clients.

> U.S. President Donald Trump's tax blueprint, which was unveiled last month, proposes allowing multinationals to bring in overseas profits at a tax rate of 10 percent versus 35 percent now.

The US. Until the tax holiday is law it's a "what if."

> Apple will continue to take over companies that help it control its supply change, which are mostly companies you haven't heard of

This. Was surprised to not see any hardware manufacturers on this list.

But many of those companies face limitations on forgien ownership (china). I also think apple enjoys not having low-paid workers directly on its payroll.

Most of the parts are not made in China. That's where assembly is, but very little of the value added content of an iPhone is from China (<5%).

assembly will probably go robotic.. at least if I was Apple that's what I would do.

Buying a company might help them double or quadruple their services revenue as they have stated that's a goal. I would love it if they bought Twitter and made it a public service. I know there could be some synergies (sic) there as the engineers could certainly help bolster the stability of Apples cloud offerings in terms of uptime and such.

To me, Twitter goes against anything stands for. Twitter is like the wild wild west. I really can't imagine how they would fit in with Apples very polished M.O.

I agree. As soon as Apple bought Twitter people would want to hold Apple liable for some of the more unsavory things that happen on there. Apple will want to nip those complains in the bud quickly, else risk their brand reputation. Quick changes to appease the loud minority would likely overreach, frustrate the majority, and most of the user base just move on to some other service and think less of Apple at the same time. All while they'll be making no money off of it. It's a no win proposition for them.

Recent deal aside, I've long thought that Bloomberg would be a good place for Twitter - they already fund their excellent news services on the back of their financial services products. Twitter would fit well into that and also matches their "real time" approach.

I keep hearing this argument that companies won't repatriate offshore cash until they can do so at an arbitrarily low tax rate. What I don't understand is why they wouldn't continue to do what they have been doing:

- borrow in the US, potentially by issuing low-rate bonds - use the cash to fund dividends or acquisitions - OR using stock to fund acquisitions

It seems this gameplan would hold up until effective interest rates on blue-chip corporate debt are higher than the proposed repatriation tax. Apple offered 3.25% on its most recent bond issue, so it would seem that a 10% tax on repatriation would not be attractive.

What am I missing?

There's no magic trick I know to borrow indefinitely at a low accumulated interest rate. If they borrow money with the overseas cash as collateral, how do they repay it? If they do it by borrowing more money, they need to cover the initial debt + the interest. That way the interest cumulates, and eventually the accumulated interest rate dwarfs the original interest rate as well as the tax rate on overseas cash repatriation.

Let me also ask: what am I missing?

> how do they repay it?

Out of cash flow in the US. The companies in question have no problem generating cash in all their markets.

> the accumulated interest rate dwarfs the original interest rate as well as the tax rate on overseas cash repatriation

See a post down thread about this, but I'm assuming the offshore cash is held in e.g. Treasuries earning ~2%+/-, or roughly 100 basis points below where they can issue debt.

This math also neglects the fact that the interest on the debt reduces US tax liability, plus any sweeteners other jurisdictions may offer for keeping piles of cash stored there. Depending on where the cash is stored, it also may be subject to lower tax rates on earned interest than it would be in the US after repatriation.

3.25% is the annual interest rate, it compounds and will cost considerably more than a one-time 10% tax would.

Thank you. I was confused.

But surely much of that overseas cash is invested and earning enough that 3.25% interest is erased or at least mostly offset?

Doesn't the word "cash" imply that the money is not invested? If they bought factories or something else productive, we'd usually refer to that as "capital".

IIRC the term is typically "cash and equivalents." [1] There is definitely not the expectation that Apple has $200B+ sitting in checking accounts unable to earn any interest.

Treasuries and certain other government securities count as "cash" in most cases.

Edit: Apple reports most of the amount bandied about as their "cash" as being in "long-term marketable securities." [2]. So it's a mix that is definitely not designed to all be instantly convertible to USD with no penalty. I'd guess most other large companies manage their cash similarly.

1 - https://en.wikipedia.org/wiki/Cash_and_cash_equivalents#Comp...

2 - https://www.apple.com/newsroom/pdfs/Q2FY17ConsolidatedFinanc...

The interest is tax-deductible in the US, which further reduces their US tax liability.

Also, as ryonwaggoner points out, they are free to buy e.g. Treasuries with the offshore cash so that the effective interest rate closer to 1% (before the effect of the reduction in tax liability).

You're missing nothing.

Saying "waiting for a lower tax rate" is just a nice way of saying "never". There is no good reason a corporation would bring offshore cash back unless they absolutely have to. The whole point of putting it there in the first place is to isolate it.

Unless something changes dramatically that makes the current practice really unfavourable to them, there should be no expectation that corporations are actively looking to use this money and are simply waiting for the "best time".

If the government really cared, wouldn't/couldn't they just force banks to forbid transactions with known tax havens?

This isn't about tax havens, it's about the fact that US law levies taxes on corporate income earned anywhere in the world.

So iPhones sold in Sweden or France (not tax havens) generate tax liability in the US. This tax is only due when the profits of those sales are brought back to the US. Companies like Apple therefore have an incentive to keep overseas profits generated outside the US.

Apple could issue more bonds and use that cash domestically for buyouts if they wanted.

Their last bond sale was just 8 billion. They can do whatever they want.

You're right, they can do whatever they want. And they have been able to do so for several years now. So the best predictor of what they will do is look at what they have done and figure out what they want.

Here's Apple's acquisitions:

https://en.wikipedia.org/wiki/List_of_mergers_and_acquisitio...

They have never done the sort of acquisition that Citi is positing here. Why is that? The most straightforward explanation is that they don't want to. And yet financial "analysts" constantly make up these Apple merger rumors... Netflix, Twitter, Tesla, Disney, Blackberry, TimeWarner, Yelp, Tidal, those are just once I came up with looking at a Bing search for "apple merger rumors." They never happen. Yet people still keep responding to them like they're not total bullshit.

People have to come to that realization on their own.

There's a new sucker born every minute, and the way you target those suckers has to adapt to regulations.

The way I realized it was when I went through ten year old yahoo finance message boards, and compared consensus arguments on stocks with what happened in those stocks. It was 100% uncorrelated.

"They have hired people we've fired," Musk said. "We always jokingly call Apple the 'Tesla Graveyard.' If you don't make it at Tesla, you go work at Apple. I'm not kidding."

Yeah, not a chance.

huh, why not? "If you can't beat 'em, buy 'em!"

Only way I can see this getting stopped would be if Musk used his poison pill: threatening to leave if they were acquired.

Totally insane scenario: Apple buys Tesla and Musk runs both. Right now sentiment towards Cook send too positive for this scenario, but as a Apple shareholder I'd like that scenario.

Except Tesla is not profitable and is heavily in debt, Musk regularly proclaims nonsense to manipulate sources of funding, while Apple is more honest, by far.

Source?

Not the original poster, but i'm guessing they are referring to Tesla including resale price guarantee in sale revenue numbers [1].

You can check out their SEC submissions as well, it's all public. [2]

1. http://www.investopedia.com/news/will-tesla-make-profit-2017...

2. https://www.sec.gov/cgi-bin/browse-edgar?action=getcompany&C...

If Tesla begins to struggle, which is still very much a possibility, I could see Apple buying them on the cheap, maybe with a term in the deal to snub Musk out of spite.

At TSLA's current price, though, no way.

Pretty sure you'd have to steal tesla, spacex, etc from Elon's cold dead hands -- he's too attached to the companies at a core emotional level. There's no way he just decides..think I'm gonna sell Tesla today...if the price is right...

What's Tesla's real endgame?

There are literally dozens of car companies, who are figuring out how to make electrics. The Tesla value is largely in the brand.

Pinky: What are we going to do tomorrow night?

Brain: The same thing we do every night, Pinky - try to take over the world!

- Pinky & The Brain

> What's Tesla's real endgame?

Batteries. If no one buys Tesla cars but all the car makers buy Tesla batteries, Tesla still wins. Gigafactory 1 at full production will be making about as many batteries as the entire planet produced in 2016. They're already working on Gigafactory 2. This is why they released all their patents - Tesla wins if electric cars win in general. Doesn't need to be Tesla cars.

(Disclaimer: I own a moderate amount of TSLA, specifically because I think investors missed this point)

I am highly doubtful of this. Automotive suppliers are famous for running on razor thin margins.

Daimler held a significant amount of Tesla stock for this reason, but dropped it when they discovered that there's no magic behind the smoke and mirrors.

> What's Tesla's real endgame?

To be the catalyst for change, at least as an outsider looking in. Showing electric cars can be mainstream, and set the blueprint for others to follow (which they are, which is why Elon did this https://www.tesla.com/blog/all-our-patent-are-belong-you). Making lots of cash, adding shareholder value, etc, are all added bonuses, but not the objective. Good on them.

None of those dozen other car companies were able to make an electric vehicle that people actually cared about.

> Citigroup analyst Jim Suva said in a note to clients.

One bozo sends out an e-mail and it's news?

This is not even an article and no explanation is given as to why Apple would specifically consider these companies other than an analyst having 3/5 stars.

Does it really need spelling out? Buying Netflix or Disney gives them access to large and valuable content libraries and distribution infrastructure. Buying Tesla gets them access to the electric car market that they have tried, and so far failed, to move into.

I've just read the report, its +20 pages long, and there is a reasoning by the equity analyst in using the mentioned companies. It does also mentioned other companies not mentioned in the article. This article is just clickbait, and this type of reports are produced every day by dozens of research analysts.

FYI, here is a screenshot of the seven target companies mentioned, as well as the impact these will have in Apple's revenue and EPS growth: https://cl.ly/0P1m0E2f043B

Netflix makes the most sense. Apple is pretty weak with content.

Would Tesla thrive under apple with Musk as the visionary?

Hulu sounds like a terrible idea

I would think Netflix's strong ties to AWS would be a non-starter for Apple.

How so? I thought apple uses aws (and google's cloud too) for some of their services.

Please no. Apple will ruin Netflix.

As a Netflix customer and happy Apple non-customer, I'm scared to death of Apple buying Netflix. So much for openness and competition! So much for cross-platform support! And the worst thing is, the great mass of Apple ecosystem inhabitants wouldn't even see the problem.

You realise that Apple Music is also available on a competing platform (Android)? Netflix's success is, in large part, because of it's ubiquity in the platforms where it's available. If Apple ever bought Netflix, I doubt they'd remove it from other platforms.

Apple Music is available on Android and Windows.

It would make absolutely no sense for them to buy Netflix only to cut out the vast majority of Netflix users by making it only available on Apple's own platforms.

Although it's not the greatest example. When Apple bought Beats and rebranded to Apple Music they still publish to Android via Google Play Store.. so they've shown cross-platform support?

Netflix imho nowadays is trying to be the HBO of cord-cutters -

In the primarily mail-dvd days, they were like the awesome video store that has everything; netflix online only has a (admittedly large) handful of titles, with ever more emphasis on the ever increasing quantity of self-produced titles...

While I was once very pro-netflix as a consumer, imagning one day that I'd be able to watch anything at all ever produced with a low subscription - I'm more ambivalent now imagining the future when the dvd rentals (and associated vast library) are dropped entirely and never digitized..

Physical DVD rentals don't require the expensive licensing deals with individual publishers that digital rental and streaming do. Netflix would offer every movie available in DVD if allowed.

If Apple were to buy Netflix, which I don't think would make any sense from a business perspective. That being said, the only thing that would make even less sense would be for Apple to buy Netflix and then make it no longer available on the web or any device other than Mac. That would make 0 sense. And I'm sure you are aware Apple Music for instance is built and supports both iOS and Android.

As a Netflix employee, I echo this sentiment. Netflix is the best place I've ever worked (and I've also worked at Google). I'm sure any takeover would ruin our culture of freedom and responsibility. I can't imagine dealing with siloed secrecy that I've heard about from Apple employees.

I find this interesting. While Google's culture and perks are fetishized in any sort of online thread, I haven't heard much about Netflix. As an outsider, all I have heard is that there is a lot of pressure to deliver, or otherwise you're out.

Genuinely curious, what is better at Netflix vs. Google?

The basic difference is that Netflix still feels like a small company, in terms of bureaucracy and management overhead.

At my level (Senior SWE, promoted to Staff SWE), Google was a place of secrecy verging on paranoia, endless meetings, and insanely huge amounts of process. You had to really work hard to get things done across organizations. Most people were just a cog in the machine, cranking stuff out. The meetings were huge, because all stakeholders needed to feel represented. Google was my first big company, and I'm sure others are worse. But Google was kind of a shock.

At Netflix, most groups develop their own process. If you see a problem, you go fix it. If you see an opportunity for improvement, you just do it. There is a lot more independent work, and a lot more small collaborations, especially across organizations.

I think most of this comes down to the Google "fungible SWE" concept vs the Netflix "Freedom and Responsibility" culture. For a concrete example, I had a bigger impact at Netflix in my first few weeks than I did in my entire career at Google. Within my first week at Google, I was still taking "new employee" classes and trying to sort out how to use the several different code repos my org used. Within my first week at Netflix, I'd identified and fixed a small regression in our FreeBSD TCP stack that was costing us 3-5% CPU across our CDN.

The one thing that sums up the different cultures is business travel. At Google (at least when I was there), you needed to find airfare and hotel that was at or below the median price paid by other Googlers. If you didn't, you needed to get your VP to sign off on your travel expenses. At Netflix, you book things yourself, looking out for the best interests of the company, and submit your expense report & get reimbursed 48hrs later.

The food was much better at Google, though. And I really miss TGIF, eng-misc, and memegen.

Awesome reply, thank you!

Your worries are pretty unfounded. The bigger concern is what Netflix would do to Apple's culture, not the other way around. Netflix is FCF negative and a fraction of the value of Apple and the value it produces.

That being said, it would actually be better for Netflix if Apple acquired it. Right now Netflix depends on access to the capital markets to fund their growth, which is why they regularly issue debt to finance it. In the event of a recession or some turmoil in markets (Europe, China, etc) that send NFLX's stock price down and bond yields up, that would severely impact NFLX's growth trajectory (spending a lot of money on original content to acquire subscribers).

The biggest threat to Netflix is Amazon and that's because they (and their shareholders) are willing to run at a loss for a long time. They have a lower cost of capital and generate FCF from other businesses. They would not be impacted by turmoil in the capital markets. As long as investing in video drives e-commerce sales (as it has), they have an asymmetric advantage over Netflix.

Apple acquiring Netflix would give Netflix the same edge. If Netflix was bundled for free with an iPhone Upgrade Plan (or in the carrier's version of it) and it drove increased iPhone sales, the economic logic for investing heavily in original content is there.

If Apple acquired Netflix, they would not make it exclusive to their hardware because that basically destroys the value of Netflix. They also would not integrate you into Apple because keeping Ted Sarandos and Reed Hastings around is key to executing the Netflix vision (but also because it keeps Apple, Apple).

I could see Netflix or Hulu, depending on price.

But I would hate to see it happen because I think that Apple would ruin Netflix.

Apple should buy Tesla and make Musk their CEO.

I don't think he has an accompanying article I can point to, but there was an episode of Exponent where Ben Thompson discussed the possibility of these giant Apple purchases (and did specifically discuss both Netflix and Tesla). He made a point that is often underappreciated given how obviously true it is: that, with rare exceptions, huge cross-sector corporate takeovers/mergers almost never work. They entice the imagination, which is why both analysts and the general public are always speculating about them, but from a business perspective it's almost never a good idea.

Apple seems to understand this pretty well: they make small, smart buys (as opposed to, say, Microsoft or even Google, who have a history of big purchases that didn't deliver), so I doubt they'll start considering takeovers like this.

Yeah. Their biggest purchase is Beats at $3B, which is astonishing low for a corporate giant like Apple. I'm not sure whether this is due to prudence or just NIH syndrome.

Video game developers? Is there any logic or rationale here? This seems vapid speculation at best.

Gaming on the iPad or iPhone or Apple TV are big money makers.

As much as I'd love them to buy Netflix, people have been saying it for years and still doesn't seem to make sense, since in general Apple get's everything it needs from Netflix through AppleTV. Owning it wouldn't greatly increase their profits vs the cost to get it. More importantly, when its time to renew all the shows, all the major networks could simply increase all there rates knowing Apple can afford it. Yes, Netflix has a lot more original content now, but even that may suffer with a company at the helm.

For Tesla, Apple can build their own car if they won't but it sounds like they have decided against that and instead will focus on building the intelligence of the cars and then sell that to all the car manufactures through licensing which is much more lucrative based on the effort involved.

Instead Apple will continue to focus on smaller companies to gain more control over their supply chain and the companies that they have to pay licenses to. That is guaranteed savings in the long run vs something like Netflix which could devalue itself with a new owner.

Why not a telco/cableco, especially if FCC reverses Net Neutrality?

Apple is not really in the service business a la Google, Facebook, Netflix, or Amazon, but they could tap into the rents the last-milers will be seeking -- and probably getting -- from the big boys/girls once NN is history.

Best thing to do is give it back to the owners of that cash: the shareholders. Let them decide.

Doing so would incur a large tax liability when transferring the funds back to the US. The reason Apple has been taking out bonds in the US instead of repatriating the overseas cash reserves is because it's cheaper to do the former to pay a dividend or perform a share buyback.

An Apple owned Netflix scares me. I like the products I use and Apple tends to be a little more of a closed ecosystem. I'd hate to see how well (or not well) Apple would support the streaming or offline options that currently exist.

This will sound pretty fan boy, but I think it's pretty obvious Musk isn't in this for the exit money and he believe he can build Tesla up to be a great company. He likely doesn't see much value add by being acquired.

That exit money put into SpaceX would totally fund his space plans though

He doesn't seem to have much problem attracting investment. He had thousands of people willing to put down $1000 toward a car that was years away from being made available.

Buy Tesla. Groom Musk for CEO of Apple.

I think he's more interested in fixing the world, not just changing it.

It's also Citi saying this, so you can ignore pretty much anything and everything they say.

I don't care about Tesla but please don't shit on Netflix.

http://imgur.com/gallery/NnYOrNd

oh fuck. please. no. no. no. Apple locks things down, gives you few choices, few integration points.

I love the direction that Microsoft is headed (and they likewise are sitting on a mountain of cash). For developers they're executing extremely well. But their overall ability to execute a unified vision is kinda bad (in practice it is really a conglomerate of a bunch of huge businesses that don't always get along).

In short. Please just let these awesome companies continue to be awesome.

What integration points does Tesla offers you that apple does not?

I'm no expert, but would such an acquisition stop any patent giveaways?

https://www.tesla.com/blog/all-our-patent-are-belong-you

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