Large M&A Is Not in Apple’s DNA: Case Study of Why Apple Won’t Buy Tesla

Apple’s Beats acquisition raised questions pertaining to Apple’s attitude towards acquisitions. The $3 billion price tag was approximately five times higher than that of its previous largest acquisition, NeXT in 1997, after adjusting for inflation. Was Beats the start of a new era in which Apple would follow other large tech companies and use some of its $150 billion cash pile to fund larger acquisitions? While Apple may alter its outward appearance in reaction to the environment, large M&A is not part of Apple’s DNA. With Apple’s product success built on collaboration and design and reinforced by Apple’s organizational structure, there is no room for large M&A. Using this theory to address a real case study, Apple will not buy Tesla because of the low probability of long-term value creation.

Acquiring Beats

Beats did not represent a change in Apple’s acquisition strategy. The $3 billion price, while large on paper, is a bit misleading because Apple acquired a significant amount of intangible assets, including brand and human capital, which I discussed in my piece titled “What the Beats is Going on? Thoughts on Apple Acquiring Beats” published soon after the rumor broke. With only 700 employees, Beats was not a large company. Approximately 200 employees were not given long-term Apple employment according to Bloomberg, leaving roughly a 500-person team, or a team the size of a small Apple division. If additional personnel are shifted to other departments over time, Apple is left with a 300-person team that can easily fit into Apple’s way of doing business. Beats ends up looking very similar to many other Apple acquisitions. I look at the Beats deal as Apple reacting to the changing music industry with no underlining change to its philosophy of avoiding large acquisitions, just as someone can change his or her physical appearance, despite having the same personality and DNA.

Apple’s Keys to Success

Apple SVP of Design Jony Ive isn’t one to shy away from describing how Apple has been so successful, and that trend continued last week with a talk he gave at Design Museum in London. To Jony, success is born from complete collaboration and focus, which at Apple means something more unique than at other companies.

Apple’s 18-person core industrial design team remains very loyal and tight-knit with no deflections over the years. The group’s small size and the benefits that arise from that make Jony hesitant to grow the group much more. It is that family-like bond that contributes to Apple’s success as products are created over a multi-year period with conversations in the earliest stages often determining where the next steps will lead. Jony told the audience at Design Museum, “[p]articularly at the beginning of ideas, we have to have incredible discipline to listen really hard. To realise we can end up somewhere very different if we make these decisions…[product design] always starts off as a conversation and a thought.”

Collaboration

Collaboration manifests itself elsewhere in Apple’s structure as major initiatives take resources from different departments.  An analogy I like to use associates an upcoming Apple product with a Macy’s Thanksgiving Day Parade balloon float.  The rope handlers (those who help guide the balloon) represent resources from different Apple departments.  If a few aren’t on the same page, the float may veer of course or become unsteady. Once the float has navigated the parade route safely, the rope handlers (employees) can move on to the next balloon (product). Bloomberg had reported that the Apple Watch had “hundreds of engineers, designers, and marketing people” working together over the span of two years. How can big M&A fit into this required collaboration to create additional value?

Design

Even if a company can find the secret to bottle collaboration, success is still not guaranteed as the keystone; intuitive design, is missing from the arch of success. Design and collaboration go hand-in-hand, not just for consumer tech hardware companies, but for any company selling a product. Jony explained this trend when he said, “I think it’s much harder for good design to come out of an organization and to come from that as a driving force. [Apple’s] goal is to desperately try to make the best products we can.” Adding in new teams, resources, and ideas to a very tightly controlled equation raises the risk of failure without adding much in the way of upside.  With Apple being a product-focused company, this delicate combination of intuitive design and collaboration makes it that much more difficult to add large M&A into the mix.

Apple’s Existing M&A Strategy

Apple has been quite active on the acquirer front, with approximately 35 acquisitions since the beginning of 2013, most of which were never made public. A few commonalities amongst these companies: small, focused, bolt-on type transactions.  Apple looks at acquisitions as a way to fill talent and resource holes that could only be addressed in a timely manner by acquisition. Tim Cook has often said while Apple has a significant amount of cash, Apple does not have unlimited resources in terms of human capital and will have holes that become apparent either in the areas of software deficiencies or hardware design.

Apple M&A Case Study: Tesla

BI Deputy Editor Jay Yarow published an article last week titled, “Apple Should Buy Tesla,” containing four reasons why Apple should acquire Tesla:

  • Apple can afford to spend $60 billion on Tesla so it should spend the cash.
  • Apple knows how to manufacture complex objects like phones and tablets, so a car shouldn’t be that much different.
  • Elon Musk could focus on other ventures besides cars.
  • Apple executives Eddy Cue, Phil Schiller, and Jony like cars.

While I assume some of these reasons are a bit tongue-in-cheek, and Yarow primarily is looking at Tesla’s popular Model S vehicle and the inability to meet demand due to manufacturing “troubles” as reasons for Apple to acquire the company, does Tesla pass the litmus test for representing a key Apple acquisition target? Three reasons lead me to conclude no; a Tesla acquisition would make little sense for Apple.

1) Tesla doesn’t bring enough value to the table. I struggle to see the value Tesla would provide Apple especially when compared to the value Tesla is creating on its own concerning energy generation, storage, and distribution.

  • Does Tesla have design talent? Yes. Does Apple need a significant infusion of design talent? No.
  • Does Tesla have a great product? Yes, the Model S. Does Apple need to have that product to offset a weaker product portfolio or missing hole in its ecosystem? No.
  • Does Tesla provide any strategic benefits to current Apple products? No (excluding possibly some aspects of battery R&D).
  • Does Tesla have headwinds or negatives that may continue after an acquisition? Yes. Regulatory roadblocks concerning vehicle sales as well as consumer limitations with electric cars.   

2) Tesla is too large and complex. With approximately 10,000 employees, a 5.5 million square foot assembly facility in Fremont, California, and now a $5 billion advanced battery factory being built in Nevada, Tesla would not be easy company to fold into Apple. Add in the financial complexity from building cars and owning such significant level of assets, and the financial impact on Apple quickly becomes just as ugly. Apple has traditionally outsourced manufacturing and assembly, and with Tesla that would be drastically altered as Tesla is known for its ability to turn raw materials into a finished product all in the same plant – one reason contributing to the vehicle’s high price.

3) Apple doesn’t need Elon Musk. Steve Jobs’ greatest product was Apple: a company built to allow complete collaboration and focus. At this point in Apple’s history, the company doesn’t need an Elon Musk figure, whose aspirational dreams concerning transportation and civilization may cause friction within Apple. That type of overarching reach and generalization could lead to significant issues for Apple and its product-led, design-focused goal where end products may end up having just as big impacts on society as some of Musk’s reaches, but without the fanfare during the development stage.

In a situation where Tesla did have value to bring to the table, such as incorporating CarPlay into its vehicles or battery technology, a partnership with Apple would make more sense, similar to Apple’s recent IBM enterprise partnership for getting more iOS devices into the corporate world.  In addition, even though Apple already has R&D dedicated to transport and vehicles, primarily on the side of energy production and efficiency, it’s not clear what the automotive industry will look like in 5-10 years and if there is a need for Apple to enter the space.  It may be more likely that Apple gets involved in automobiles at a point where the industry has shifted to a position where a new entrant with a different way of looking at the world and automobiles can enter the space to create a great product.

Apple’s M&A Going Forward

I wouldn’t expect any slowdown in Apple’s acquisition pace as the company continues to push the envelope with various products such as more powerful mobile devices, innovative industrial design, and new services for content (music, video, apps, and communication). By remaining “focused” on a few products, Apple does leave itself exposed to holes where outside talent may be needed, but with $150 billion of cash and a company DNA that doesn’t include large M&A, Apple has significant resources to accomplish the goal of making great products. 

 

 


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