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Summary

  • Apple is close to buying Beats Electronics for $3.2 billion.
  • Integrating the two firms would prove challenging - could destroy Apple's shareholder value.
  • Instead, Apple should consider acquiring Spotify, Rdio or Pandora.

On Thursday, the Financial Times reported that Apple (NASDAQ:AAPL) was closing in on its $3.2 billion purchase of Beats Electronics. The deal, which would be Apple's largest ever acquisition, could be announced formally next week.

The reasoning behind the acquisition does seem to raise many questions. The value of Beats Electronics primarily stems from its strong brand value. After all, Beats does not have the most advanced headphone technology, nor the most popular music streaming service. But, Apple has its own strong brand image and incorporating the two disparate but otherwise successful brands could prove more difficult than expected.

Headphones and other audio devices have traditionally been accessories to smartphones, tablets and personal computers; and not necessarily considered a component in the final product. Bundling headphones from Beats with a new iPhone may not be a wise practice, as not all consumers would favor the complimentary headphones. A majority of Beats' headphones carry a retail price in excess of $100, and consumers who prefer their own choice of headphones would not be so willing to pay a premium for their inclusion. The bundling of lower value Beats headphones could also damage the brand value of Beats Electronics in the longer term.

Apple may be more interested in Beats' online music subscription service, Beats Music. The popularity of Apple's iTunes appears to have reached its peak, with sales declining in 2013 for the first time since its launch back in 2003. The business model of the music industry has once again shifted, with the rapidly increasing popularity of subscription streaming services. But, Beats Music had only been launched earlier this year. Beats Music is not the most popular and inconceivably unique in terms of its software and product offering. One exception could be its subscription partnership with a mobile network carrier, with its deal in January with AT&T (NYSE:T). But Apple could surely arrange similar deals with networks, given its existing relationships with them on phone sales. Moreover, Apple has already launched its own iTunes Radio in September 2013.

Utilizing the Beats brand in conjunction with Apple's products would only serve to dilute the strength of Apple's own branding. Interbrand, a major brand consultancy firm, considers Apple to be the most valuable brand in 2013, with a brand value of $98 billion. Apple simply does not need another brand to work with. Instead, it should focus on strengthening its own brand image, through nurturing creativity and innovation within itself.

Maintaining Beats as an independent brand within Apple could also prove difficult. Apple would need to walk a tightrope to balance the need for broadening the market for Beats' hardware and maintaining exclusivity for itself. Beats would likely find it more difficult to sell to hardware manufacturers such as HTC (OTC:HTCCY) and HP (NYSE:HPQ) in the future. More recently, Beats has offered its audio systems to automotive manufacturers, including Chrysler and Fiat (OTCPK:FIATY). Interference from Apple, including the imposition of bundling its system with Apple products could curtail the flexibility that Beats currently enjoys.

If Apple is instead interested in accumulating creative talent, this acquisition would be unlikely to deliver results in the long run. One of the main lessons of past technology deal activity has been that buying creative talent seldom works. Creativity requires constant nurturing. Attracting talent is important, but hanging on to them is just as essential. Integrating employees has always been tough, especially because of the potential culture clash between a corporate giant and a small creative enterprise. Key people often leave the firm after an acquisition when they struggle to adapt towards corporate bureaucracy, lose their motivation and as the firm fails to recognize their importance. Would the Beats brand continue to be as successful once its founders, Dr. Dre and Jimmy Iovine, step down?

Beats Electronics does seem to be a great company; one that has successfully developed a spectacular brand in audio devices since its founding in 2008. But an acquisition from Apple does not seem to create value for Apple's shareholders, as integrating the products from both companies, whilst protecting the brands' identities, could prove most challenging. Both companies would seem to benefit from retaining their independent identities. But shareholders in Beats Electronics could realize a tidy sum from selling the company to Apple in the next few weeks. Alternatively, they could believe the company would generate more value from going their separate ways. It will be likely that this will be the decision that determines the outcome of this deal.

With cash and marketable securities totaling more than $150 billion, Apple has struggled to find suitable acquisitions. An acquisition of Beats seems to originate from a lack of options and ideas, rather than anything else. Instead, Apple should focus more on expanding and accelerating its capital return programme. If Apple is seriously concerned with developing its own music streaming service, it should consider an acquisition of Spotify, Rdio or Pandora (NYSE:P) instead. Acquiring one of them in place of Beats could prevent them from falling into the hands of Google (NASDAQ:GOOG) (NASDAQ:GOOGL), Microsoft (NASDAQ:MSFT) or Amazon (NASDAQ:AMZN). Buying Beats would only encourage Apple's competitors to snap up Spotify and others. If instead, it needs hardware technology for audio devices, there are plenty of more suitable acquisition candidates. Apple should not spend its cash pile on trying to acquire creative talent or the Beats' brand.

Source: Apple Would Find It Difficult To Integrate Beats Electronics