It's been two weeks since the Financial Times reported that Apple (NASDAQ:AAPL) was "closing in" on a $3.2 billion deal for Beats Electronics, which would make it Apple's largest-ever acquisition.
Although neither company has confirmed they've had discussions, industry experts believe it is something that is likely to happen. But not everyone agrees on the merits of the deal. For that matter, very few believe Beats is worth the 60% premium Apple is willing to pay. According to Forbes, the four-year old company co-founded by Rapper Dr. Dre, was worth no more than $2 billion.
And when you consider that The Carlyle Group (NASDAQ:CG) bought 50% of the company last September for just $500 million, there's some credence to what analysts are saying. But according to a recent Forbes article, Beats may actually be a steal for Apple, given their mutual tax interests.
The article, written by Joe Harpaz, points out that Beats, by virtue of a holding company, had established tax residency in Ireland in 2012. This means that Apple can actually pursue a deal with its foreign cash that has not been repatriated to the U.S. Harpaz added:
"Following the rough tax math of a foreign acquisition, Apple's $3.2 billion bid would really be more like $2 billion if the transaction could take place in Ireland."
As it stands, Apple's combined overseas cash and investments total more than $130 billion. Although we've cited Apple's cash hoard of $151 billion, 88% of that is stashed overseas. And this is why Beats is the perfect fit.
According to the Irish Examiner, to take advantage of lower corporate-tax rates offered by Ireland, Dr. Dre had established three separate Beats companies; Beats Electronics Services Ltd. and Beats Electronics International Ltd. Both were subsidiaries to Beats Electronics Holding Ltd. The Irish Examiner noted that all three entities shared the address; O'Mahony Donnelly accountants in Clonakilty, County Cork, Ireland.
At first glance, this deal was hated by most experts. Piper Jaffray analyst Gene Munster was one of the first to say it "sounds bad." Munster also said beyond the brand, Beats doesn't offer Apple any advantage in terms of intellectual property. But that's where he's wrong.
As it stands, there is significant benefit here for Apple to do a foreign deal. Beats at $2 billion with foreign cash makes more sense than Apple buying Twitter (NYSE:TWTR) or Yahoo! (NASDAQ:YHOO), which Munster see as better deals. Consider, from 2010 to 2012, Beats has seen its sales grow more than five times. You can't name another tech or hardware company that has grown revenues at the same pace.
In the process, Apple also gets the streaming service to offset the decline in iTunes revenue, while at the same time acquiring a growing share in the accessories industry. And consider, even if the Beats deal were to close today, Apple would still have more cash than it needs to operate its business for several more years.
Some have argued that CEO Tim Cook is "embarking on a dangerous path," leading Apple in a direction that opposes the ideals of legendary predecessor Steve Jobs. That may be so. But Steve Jobs is not here to deal with the onslaught of Samsung (OTC:SSNLF). Nor does he have to worry about how dominant Google's (NASDAQ:GOOG) (NASDAQ:GOOGL) Android has become.
And contrary to what some believe, Apple is not admitting defeat. Rather, Tim Cook is showing that he's unafraid to acquire external talent to compensate for what Apple does not have the time to do organically. Apple is thinking differently. That's what Steve Jobs preached wasn't it?
Disclosure: I am long AAPL.
Business relationship disclosure: The article has been written by Wall Street Playbook's tech sector analyst. Wall Street Playbook is not receiving compensation for it (other than from Seeking Alpha). Wall Street Playbook has no business relationship with any company whose stock is mentioned in this article.