Why Apple Should Buy Sony

Apple (NASDAQ: AAPL) is often linked with large take-over possibilities. However, the company has always maintained a policy of frequent purchases of only small companies with niche strengths to add to Apple’s existing ones.

Sony (NASDAQ: SNE) is involved in both hardware and software areas which Apple aims to penetrate further in the next few years. A purchase of Sony would give tremendous momentum to the company’s strategic direction. This especially applies to Asia where Apple’s latest offerings may have limited appeal. A tie-up with Sony would give Apple the acceleration in service revenues it needs to transition away from its reliance on iPhone revenue.

Apple’s huge cash reserves and raised stock price compares to Sony’s stock decline in the past couple of months. This makes the deal very affordable at present.
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THE FINANCES
At the close of 2018, Apple had US$245 billion in cash. Its net cash position was US$130 billion.

Sony’s market cap is US$52.7 billion. Its enterprise value is US$48 billion. In general stocks with an enterprise value lower than their market cap are an attractive proposition on a purely numbers game.

The 3-year stock chart of Sony is illustrated below:

image


The growth in the stock price shows what a good business model the company possesses.

The valuation of Sony is very favorable at present as illustrated below:
 

sony valuation

Such a good opportunity to buy Sony at a reasonable price might not come again. It is likely that the Sony stock price will soon continue its upwards path. It has just been given a strong Buy rating by Jefferies ahead of its results announcement on 26th April.

It was recently announced that Apple’s M&A head Adrian Perica would now be reporting direct to Tim Cook. Perhaps that signals an increased interest by Cook in M&A developments. The largest purchases the company has made so far were Beats Electronics for US$3 billion in 2014 and Shazam in December 2017 for US$400 million. The company has focused on buying small companies, often those involved in semiconductors. This has been successful in producing very smart processors to improve the performance of its hardware devices. In future, the emphasis for the company may be away from hardware and more on software.

Apple could make a pure cash offer or a cash/stock offer without stretching itself at all. The cash in hand they have will otherwise most likely be spent on a combination of stock buybacks and dividends. Whilst having some short-term attraction for stockholders,t his is not a strategy for using cash for long-term growth. Early last year Apple announced it had US$100 billion of funds to use for buybacks. Up to the end of Q3 2018, they had spent US$63 billion on share buybacks and were showing a loss of US$9 billion on these, according to the Wall Street Journal. That loss/gain picture might look better now.

It is expected that the company will raise their dividend again this year. The total cost of the raise is unlikely to be very substantial. Because of the share buybacks, they will have fewer shares outstanding on which to pay the increased dividend. The last quarterly results, in fact, showed an increase in cash reserves.
 

SONY PICTURES
There has been speculation recently that Apple might swoop to buy the Sony Pictures division. This seems quite unlikely. The presumably well-connected “Variety” magazine had predicted in December that this would happen sometime in 2019. Rumors were heightened when Wedbush recently suggested Apple should buy either Sony Pictures or another production house. They mentioned A24 (with whom Apple already has a production agreement) or Lionsgate (NYSE:LGF-A) as possible alternatives to Sony Pictures.

Speculation over Sony divesting some of its assets has been heightened. This follows the news that the Third Point hedge fund, controlled by Daniel Loeb, has taken a new possibly quite substantial position in Sony stock. Third Point previously owned 7% of Sony. They made a gain but in fact, sold out before the big rise in Sony’s stock price in recent years.

There have been further rumors that Amazon (NASDAQ: AMZN) is also interested in Sony Pictures.

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Nicholas Charles Cox 1 month ago Author's comment

The Q4 results show again what an attractive company Sony island the stock price just got higher for an Apple purchase of the company (which I am fairly sure won't happen!)

Nicholas Charles Cox 1 month ago Author's comment

Hi Kurt,

Well it's true that Sony is quite large and also a bit of a national icon for Japan.But as I think my article pointed out,it's not very high in value compared to Apple's cash reserves.

Kurt Benson 1 month ago Member's comment

Yes, I agree on that point. I did not mean it was too big as in expensive. But too big as in complex. Different products, different philosophy, different culture. It would not be easy. Not saying it's impossible though.

Nicholas Charles Cox 1 month ago Author's comment

Hi Barry,

Yes I agree some of the products would have compatibility issues, but I do not believe they are insuperable

Barry Hochhauser 1 month ago Member's comment

Fascinating idea with a lot of obvious synergies. But isn't the fact that their products are completely incompatible cause a number of problems that would be too difficult to overcome? $AAPL $SNE

Alexis Renault 1 month ago Member's comment

I for one love the idea. #Sony could benefit from #Apple's innovation.

Danny Straus 1 month ago Member's comment

I'd argue that Sony is the innovator. Apple doesn't invest anything. They simply improve on other company's products. I would say that Sony has the superior products but could benefit from Apple's ability to make things easier to use.

Kurt Benson 1 month ago Member's comment

Good thorough analysis and very intriguing idea. But realistically, Sony is likely too large to be acquired by Apple easily.