Could a growing company that makes most of its money selling to individuals in China breathe life into a shrinking giant that sells to enterprises?
If the acquirer is
Before getting into these reasons, it is worth pointing out that such a deal would make Warren Buffett smile. According to AP, he "believes that IBM will be making more money ten years from now than it does today, and IBM is repurchasing its stock aggressively so Berkshire's share of the company's profits -- [it owns 9% of IBM stock now] will grow over time -- [due to revenues from IBM's cloud computing and corporate services]."
Whether that happens or not, Apple is becoming increasingly dependent on demand in China for its eight year old iPhone line -- China is Apple's biggest region and its sales soared 70% there to $16.8 billion in the first three months of 2015 -- while IBM keeps getting smaller while promoting the hope that the cloud -- it invested $4 billion there, according to the Wall Street Journal -- will be its salvation.
Apple vs IBM Stock Prices Over Time | FindTheCompany
During the same period, IBM's revenue dropped 12% to $19.59 billion "as a surging U.S. dollar compounded the impact of shrinking hardware sales. It was the company’s 12th straight quarter of year-on-year declines," according to the Journal.
Tim Cook knows IBM
Cook worked at IBM from 1982 to 1994. Cook rose up the ranks at IBM and in his last job there he was "North American Fulfillment director, managing manufacturing and distribution functions for IBM's Personal Computer Company in both North and Latin America," according to Biography.com.
In July 2014, IBM and Apple partnered "to deliver Apple technology to big business," according to the Wall Street Journal. IBM has since developed software for Apple’s iOS operating system, but it has been unclear how important the relationship is to either company’s bottom line.
Last month, IBM and Apple announced a deal to get iPads into the hands of elderly Japanese through Japan Post. But so far, the IBM partnership has not boosted iPad sales which tumbled 23% to 12.6 million in the first three months of 2015, according to the Journal.
On April 30, Cook expressed optimism for the partnership, noting “We want to change the way people work. There are too many enterprises that are stuck in a different era.”
Apple can afford to make the buy
IBM's market capitalization is currently $171 billion. Let's assume that Buffett would be willing to part with his shares for a 20% control premium -- meaning that IBM might cost Apple $205 billion.
For now, Apple's market capitalization is $743 billion -- and it could borrow more money if it decided to use debt to help finance that $205 billion purchase. But it would take 28% of Apple stock to buy IBM at that price.
IBM needs help with execution
Whether it makes economic sense for Apple to buy IBM depends on whether the merger could generate enough additional cash flow in current dollars to more than offset the acquisition price.
I think such a deal could generate some significant cost savings by consolidating overlapping overhead departments like finance, human resources, and procurement. Perhaps the two companies could find ways to save on office space as well.
Moreover, Apple might be able to spin off some of IBM's business lines that would not fit the combined companies. For example, it probably would not make sense for Apple to keep IBM's mainframe business.
On the other hand, IBM has a well-developed sales and consulting arm focusing on business and government that Apple lacks.
Apple could apply its long-proven ability to build products that individuals want to own -- it might be able to find gems within IBM's vast library of patents and intellectual property that it could turn into products that enterprises would want to buy.
Ultimately, such a deal would only make sense if Apple could figure out how to turn IBM into a company that grows fast by selling products that businesses want to own.
On the other hand, perhaps this is an execution challenge that is beyond the ability of any human being to master.
