Apple's mergers and acquisitions (M&A) strategy is misunderstood. Consensus has settled on the view that Apple needs to change its rigid philosophy towards M&A and begin using its $233 billion of cash to buy larger competitors and find new sources of revenue. These suggestions are misplaced. Apple's M&A strategy has actually seen quite a bit of change over the years, and there is evidence that we are about to see even greater change going forward. Apple's investment in Didi Chuxing marks the official start of Apple M&A entering a new phase as the company pivots into transportation.

Apple M&A Activity

The best way to begin analyzing Apple's M&A strategy is to look at the company's acquisition activity. There is a perception that Apple does not acquire many companies. The numbers tell a different story. Since 1997, Apple has acquired more than 70 companies. When including the smaller transactions that were never disclosed, Apple's acquisition list likely exceeds 80 companies over the past nineteen years. Exhibit 1 breaks out Apple's publicly disclosed acquisitions by year.

Exhibit 1: Apple Acquisitions (Publicly Disclosed)

Screen Shot 2016-05-31 at 3.16.57 PM.png

One reason why it seems like Apple has not kept pace with its peers in terms of M&A is that Apple often purchases technologies and small teams of talent. A consequence of this strategy is that Apple's acquisition activity doesn't garner the same type of press coverage as a big, headline-grabbing transaction would receive. In addition, no single M&A transaction has ended up representing a significant percentage of Apple's cash levels, which leads many to conclude that Apple is not placing as significant of a bet with any one acquisition. To quantify these statements, I turned to Apple's cash flow statements.

Each quarter, Apple discloses the amount of cash spent on M&A as "payments made in connection with business acquisitions." While the line item may not catch the full amount spent on acquiring teams of talent and assets when taking into account stock-based compensation, or intangible assets like patents, and of course investments in machinery, it does a good job at estimating the amount spent to acquire companies. As shown in Exhibit 2, while Apple has clearly been spending more on M&A in recent years, the absolute totals are still low compared to Apple's growing cash levels.

Exhibit 2: Apple M&A Activity (Business Acquisitions Payments)

Note: Inflation adjusted* Includes $1 billion investment in Didi — Note: Inflation adjusted
* Includes $1 billion investment in Didi

Apple M&A Observations

After analyzing 19 years of Apple M&A activity, I reached two primary observations that are useful for determining where Apple's M&A strategy is headed.

Apple M&A Is Evolving. Contrary to popular belief, Apple M&A has actually experienced quite a bit of change over the years. The first major difference is that management has increased the M&A pace. Apple acquired more companies from 2013 to 2015 than they did in the previous 16 years leading up to 2013. When looking at the amount spent on M&A, the purchases between 2013 and 2015 accounted for 70% of the total amount Apple spent on M&A since 1997.

Another example of a changing M&A strategy involves price. Apple management is not opposed to paying a large sum of money for an acquisition. Apple's $3 billion Beats acquisition in 2014 was six times as large as the second-highest price paid for a company (NeXT in 1997). In fact, Beats represents 40% of the total spent on M&A over the past nineteen years. Excluding Beats, the average price paid per acquisition was less than $30 million.

Management's M&A Strategy Is Very Focused. Despite a changed strategy, there is evidence that management is still guided by the same principles and ideals when acquiring companies. There is no evidence that Apple purchases companies in order to directly boost revenue or earnings. Instead, acquisitions continue to be used to enhance Apple products. This product-focused mindset is one reason why most Apple acquisitions are eventually incorporated into Apple's product line. While some deals, such as Quattro Wireless, a mobile advertising company, may not pan out exactly as management envisioned, there are very few acquisitions that have turned out to be failures leading to significant write downs. In addition, there are no signs that Apple management has used M&A for pet projects or to appease foreign governments or regulators.

M&A Phases

Given that Apple's M&A strategy has undergone a significant change in recent years, I took a closer look to find the fundamental driver behind this change. Adding a bit more context to the first exhibit ended up providing much clarity. The iPhone was the catalyst that ended up driving much of the change in Apple M&A. As seen in the table in Exhibit 3, which categorizes each Apple acquisition by the product category it ended up benefiting, there have been two distinct M&A phases (Mac and iOS) with the iPhone's launch in 2007 marking the bridge between the two.

Exhibit 3: Apple Acquisitions Categorized by Product Category

For 10 years starting with the NeXT acquisition in 1997, all but one Apple acquisition were related to strengthening the Mac platform. While this may not come as a complete shock given Apple's product line at the time, it is noteworthy that M&A was not used for the iPod or to expand into other product categories or industries.

Apple then experienced five years of limited to no M&A activity from 2003 to 2007. While the outside world did not know it at the time, this "buffer" zone ended up being pivotal years for iPhone development.

Since acquiring P.A. Semi in 2008, every acquisition but one has been focused on strengthening the iPhone and broader iOS platform. This new iOS focus ushered in a significant increase in both the pace of M&A and the amount of cash spent buying companies. In addition, Apple has shown an appetite for a wider range of target acquisitions to enhance iOS ranging from intelligent assistants, music streaming, and maps to mobile processors, cameras, and fingerprint sensors.

Connecting the Apple M&A Dots

Taking what we know about Apple's M&A activity and the significant change that has taken place as the iPhone ushered in a new iOS-focused M&A phase, there are a few logic explanations that help explain Apple's changing M&A strategy.

Apple's M&A strategy is built much like the company's functional organizational structure in which the product is placed above all else. Management's primary goal for M&A is to support Apple's evolving product line. As the company moves from industry to industry, management relies on M&A to purchase new core competencies. The end result is that Apple M&A does indeed undergo changes in terms of pace, amount spent and scope. However, similar to how Apple's culture remains intact despite a different product line, Apple still relies on the same underlying philosophy when it comes to acquiring companies.

In the early 2000s, Apple's M&A activity was dedicated to enhancing software that supported its Mac-as-the-hub product strategy. Apple acquisitions focused on video and photo editing in addition to music and other forms of content that were meant to strengthen the Mac and make it the center spoke for a range of peripheral devices. Once Apple pivoted into the phone industry with the iPhone, management began to use M&A to buy new core competencies in mobile. There was only one acquisition before the iPhone was unveiled in January 2007 (FingerWorks in 2006) that went on to play a major role in iOS development.

Management saw at a very early stage that owning the core technologies found in iPhone would end up giving Apple a competitive advantage over its peers. Some of this thought process was a carryover from the Mac. In order to have the Mac stand out from Windows in terms of content creation, Apple acquired Raycer Graphics. Similar motivation led to a number of acquisitions meant to set the iPhone (and iPad) apart, including P.A. Semi (mobile processors), Siri (natural language processing) and AuthenTec (fingerprint sensors). Instead of placing revenue generation as the primary motivation to own these companies, management's goal was to expand Apple's capabilities with mobile devices and strengthen the iOS platform.

As iOS devices began to handle a growing percentage of our daily computing tasks, Apple's M&A pace sped up to include a wider range of areas including search, mapping, and recently, AR, VR and AI. Each one of these fields represents a new chapter for Apple, something with which Apple may not have had much experience, and positioned M&A almost as a learning tool used to buy teams of talent and technology.

The New M&A Apple Phase

Despite the iOS platform having plenty of runway left with Apple investing heavily in new wearables, Apple TV and continued iPhone and iPad updates, we are already seeing the beginning stages of a new Apple M&A phase.

Apple's $1 billion investment in Didi earlier this month marks the newest phase of Apple M&A (I went over the Didi deal in detail here.) The deal doesn't stand out because of its financial arrangements. Apple has purchased stakes in companies in the past with mixed results. In 1999, Apple invested $12.5 million in Akamai, a Internet content delivery service, making a sizable profit on its investment during the dot-com bubble. Also, in 1999, Apple invested $100 million in Samsung to help the company with flat panel display production. In 2000, Apple invested $200 million in EarthLink, an Internet service provider, leading to a business arrangement in which Apple would benefit from a Mac user subscribing to EarthLink. Apple later had to write down its investment. Apple also held a significant investment in ARM Holdings for years during the 1990s and early 2000s.

The Apple/Didi deal is intriguing because it is the first M&A signal that Apple is beginning to pivot into transportation. We know Apple is working on an electric car with Project Titan and I actually place the odds of Apple selling an electric car as much higher than most people assume. By investing in Didi, Apple is not only interested in gaining an early foothold in the Chinese auto industry, but also beginning to think about a likely source of demand for an eventual Apple Car.

This next M&A phase will likely first include Apple buying additional stakes in ridesharing companies ahead of an Apple Car release. The most obvious candidates are those that have entered into a strategic partnership with Didi, including Lyft in the U.S., Grab in Southeast Asia, and Ola in India. Combined, these four ridesharing companies represent the vast majority of today's ridesharing industry as measured by drivers and rides given each day.

The primary reason Apple would buy smaller, minority stakes in these companies instead of just forming business partnerships or alliances is that the ridesharing industry is still very much in the early innings where startups need capital to compete and gain market share. Along with gaining access to Apple's $230 billion of cash, having Apple has a strategic investor gives these companies an advantage over their peers. Meanwhile, at the other end of the spectrum, there is no clear rationale for Apple to acquire large, controlling stakes in these ridesharing companies.

By investing in ridesharing companies, Apple would be looking to form a demand source for an eventual Apple Car, similar to how they work with mobile carriers to sell iPhones. Ridesharing is changing how the world moves from Point A to Point B, and once electric cars with full level 4 autonomy become a reality, car ownership models will come under pressure. Ridesharing companies are not just taxi hailing services but transportation logistics companies. A case can me made that Apple is getting an early start investing in a core technology for the automobile: demand and supply logistics.

Once an Apple Car has been released, Apple will then use M&A to further expand its core competencies in the auto space, and this new M&A phase will likely go on to last for decades.

Apple M&A Embraces Change

Apple's culture embraces change. The only way Apple will remain relevant is to reinvent itself. Similarly, Apple M&A has displayed a similar type of change over the years, and this trend will only intensify when an Apple Car platform is introduced. Instead of buying a company such as Tesla to enter the auto industry with a new product, Apple will instead rely on Project Titan and its own resources to design and sell an electric car. Once a product has shipped, Apple will be in a better position to observe the biggest holes in its product offering and strategy. M&A will then enter the equation in earnest.

One of the bigger unknowns entering this new M&A phase involves the degree to which Apple can transplant its expertise with iOS into a car. We already know Apple's focus on acquiring mapping assets will play a crucial role in its move into transportation. The same will likely apply to Apple's recent transactions with AR, VR, and AI acquisitions.

Similar to the FingerWorks acquisition in 2006 (for iPhone in 2007) and Passif Semiconductor in 2013 (for wearables in 2014), Apple's Didi investment will eventually be looked at as evidence of Apple preparing to enter a new industry. The fact that Apple's stake in Didi marks the first time Apple has taken a stake in a company since Imagination Technologies in 2008 foreshadows how Apple M&A is going to change to reflect a new industry.

Receive my analysis and perspective on Apple throughout the week via exclusive daily updates (2-3 stories a day, 10-12 stories a week). To sign up, visit the membership page.