While going through Apple’s recently-filed 10-K for FY2021, one number jumped out at me. It wasn’t the record iPhone sales, strong margins, or phenomenal free cash flow. Instead, it was the lack of cash spent on M&A. In 2021, Apple spent just $33 million on business acquisitions (M&A). That’s a record low for Apple with Tim Cook as CEO. It’s a number that deserves further investigation as Apple’s M&A strategy and philosophy play a big role in how Apple was able to get to where it is today.

Every quarter, Apple reports the amount of cash spent on M&A in the cash flow statement via “Payments made in connection with business acquisitions” within investing activities. The company also reports the amount of cash spent on acquiring intangible assets like patent portfolios via “Other” or “Payment for acquisition of intangible assets.” It is important to note these totals do not reflect payments tied with capital expenditures (property, plant, and equipment). For a company as secretive as Apple, these lines items are among the first things to check out when 10-Qs and 10-Ks are published. Only a fraction of Apple’s acquisitions are ever announced or known via press release or blog post. However, as the saying goes, cash flow doesn’t lie - whatever Apple spends on acquisitions will appear for all to see.

Exhibit 1 shows the amount of cash Apple spent on both business acquisitions (what most people commonly refer to as M&A) and acquiring intangible assets/other going back to 2006.

Exhibit 1: Apple M&A (Cash Payments)

Since 2006, Apple has spent $20.6 billion on M&A with about half of the total tied to “business acquisitions.” The median is $1 billion per year. However, in 2021, Apple spent just $33 million on business acquisitions. That is the lowest amount since 2009 when Steve Jobs was still Apple CEO.

I also examined Apple’s M&A history to count the number of deals by year. There is a major caveat found with such an exercise - I am limited to the number of known acquisitions. Given Apple’s secrecy, a number of acquisitions are never disclosed. To be fair, these unknown acquisitions tend to be small and usually involve teams of talent.

Exhibit 2: Apple M&A (Number of Deals)

Why was 2021 such a quiet year for Apple M&A activity? For many, the pandemic will probably be positioned as a logical explanation. With most teams working from home for a good portion of the year (Apple’s fiscal year starts in October), the environment may not have been right for M&A.

Diving deeper into that explanation, a number of logic holes appear. During the pandemic, there has been no overall decline in M&A activity in tech land. In fact, industry numbers point to a 50%+ increase in M&A activity as measured by deal count. A number of major acquisitions were also announced in FY2021 including Square/Afterpay, Microsoft/Nunance, and Salesforce/Slack. One could make the case that work from home actually contributed to an M&A bonanza as mid- and senior-level executives see and experience shortcomings in product portfolios.

My suspicion is that 2021 was a quiet M&A year for Apple given where the company finds itself from a product pipeline perspective. For the better part of the past five years, Apple’s mixed reality/AR plans have been the catalyst behind approximately 20% of Apple’s M&A deals. Apple’s foray into face wearables is now right around the corner - so close that the company likely has the main ingredients to get a V1 and V2 out the door without the need for additional M&A. Meanwhile, long-term R&D projects like Project Titan are still too far away to lead to a sudden M&A rush. Over the past five years, only three Apple acquisitions can be tied to its automotive ambitions.

We can’t underestimate another factor behind Apple’s quiet M&A year - Apple is doubling down on its long-held M&A philosophy. Apple does not use M&A to acquire revenue, users, or even products. Instead, Apple uses M&A as a tool to acquire talent and technology. There is a very simple thought process behind this philosophy. Apple feels that the product development processes already in place within the company lead to the best products capable of delivering premium experiences. Management is not interested in circumventing these proven processes by acquiring established products that have already gone through another company’s development process phase. Instead, Apple is looking to fill talent and technology holes that may become apparent during the product development process.

Apple’s Beats acquisition in 2014 wasn’t about Apple getting its hands on a wired headphones business. Rather, it was about music streaming assets (and the people behind such assets).
The Shazam acquisition in 2018 wasn’t about acquiring a network of users but rather about content recognition technology that could come in handy for AR and mixed reality.
Dark Sky wasn’t about acquiring App Store revenue via a paid weather app but rather about building the Dark Sky API (hyperlocal weather) into its wearables platform.
Beddit wasn’t about acquiring a sleep tracking accessory but rather about the complicated algorithms related to ballistocardiography - the method of detecting heartbeats and breathing rhythm from small movements like cardiac contraction force.

The reason Apple’s M&A strategy works so well for the company is that it keeps management focused on developing great products and not trying to quickly grow the user base or revenue. Such items (users and revenue) are byproducts of a successful product development process. Said another way, the way for Apple to succeed from a product and financial perspective is to bet on itself and the processes that it has developed over the past two decades.

This thinking plays a role in Apple’s share buyback strategy as well. For years, Apple has been criticized by outsiders for using excess cash to buy back shares instead of buying other companies. The suggestion that Apple should have bought Instagram, Disney, Spotify, Fitbit, Tesla, Peloton, and Netflix all miss a crucial point - they never consider how Apple thinks about the world. The way forward for Apple isn’t to use M&A to expand its product line with established products designed to stand on their own. Instead, it’s to use M&A to reinforce its product development processes by filling asset holes that will inevitably show up as Apple looks to enter new industries.

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