What if Apple (AAPL) bought Volkswagen (VLKAY) outright?
+ 
= ?
Yes, I've read about Apple execs are talking with BMW about partnering the Apple Titan. I've also read about VW's problems. Things can change fast in business.
Here's some thoughts about the situation. What do you think?
The Apple Titan is Coming
Apple has indicated it plans to enter the automobile market. I have no reason to doubt it. Recently, Fortune ran an article outlining some ramp-up figures. The prospective Titan development staff is being increased to 1800 people. For comparison, Apple utilized about 1000 people to develop the iPhone. Only a few hundred were necessary to develop the iWatch. Something big is going on.
I can think of several reasons why the Apple Titan isn't just likely coming down the pike, but a potential winner:
- Currently, the auto market is ripe for disruptive technology. Both the internal combustion engine and "human driver" paradigms are being challenged. When it come to melding advanced technology with customer appeal, Apple is a global leader; arguably the best on the planet.
- Apple is already in the business of assembling things. Of course, Apple designs and distributes outstanding tech products. However, at its core, Apple outsources components and assembles gadgets through a premier global supply chain. Required competencies to outsource building a car or a computer aren't far removed.
- Electric cars are far simpler to engineer than internal combustion automobiles. There are far less moving parts. The biggest issue: battery life. Who other than Apple (perhaps Tesla) is better-suited to understand, develop and control battery utilization? Let me be clear: I'm not sure I want to get stuck in the paradigm that Apple is wed to the electric car. We just know that's the first step. But I digress.
- Apple is an aspirational brand; its products have a "look and feel" to them that delight customers. And Apple has a LOT of worldwide customers already. Some might say cult-like. I submit customers buying an Apple product, and likely up-paying for it, is largely an emotional experience. What's another product that's primarily an emotional purchase? Yes, folks, it's buying a new car. Believe it.
Volkswagen is in the Dumps....For Now
Well, sort of.
I won't rehash the emissions software problems VW finds itself embroiled in; it's all over the internet. Indeed, willfully ginning up and installing software in at least 11 million vehicles to "beat the system" is a pretty big problem.
Isn't it?
Certainly, a firestorm has started and won't go away anytime soon. Heads will roll. Criminal charges are possible. Negative media coverage is certain.
Despite the hype, and sans some "green" attorneys: no one has been killed by the software. On September 28, Forbes ran a good piece about this. Recommended reading.
What we've learned from Toyota in 2005, and more recently General Motors, is that the media makes far more of recalls and brand damage than consumers. You can go back farther in history, and the auto recall story is littered with the same story: big-splash headlines, allegations, threats, a search for the guilty, apologies, subsequent lawsuits/fines, and a year or two later....is all winds up.
The aforementioned reasoning, if you buy it, isn't only a good reason for Apple to consider buying Volkswagen. It's also a primary reason it won't happen. VW management knows it can make amends, pay restitution, clear its name, and carry on.
Volkswagen Isn't Going Under
In each of the past 2 years, the Company generated $11 to $12 billion operating cash flow. In 2015, VW logged $7.8 billion in just the first 2 quarters. The balance sheet is alright. On June 30, cash and short term investments totaled $32.7 billion.
However, VW's market cap has fallen from a June peak of $74 billion Euros (US$81 billion) to just $31 billion Euros (US$34 billion) this week.
Hmmmm.
If we accept no irreparable damage will be done to the franchise, coupled with the fact that customers will have a difficult time proving how they were harmed personally (unlike Toyota or General Motors), doesn't a $47 billion haircut seem a little harsh?
Toyota Motors (TM) and General Motors (GM) ended up with regulatory fines of $1.2 billion and $0.94 billion, respectively. Recall cost GM a couple billion more. GM ended up recalling about 30 million vehicles.
How many VW cars require a recall so far? 11 billion.
Toyota and GM also racked up hundreds of millions of dollars in personal injury and wrongful death judgments/settlements. I'm sure VW customers will try, but less certain how far they will get.
So Why Apple / Volkswagen?
Here's a few thoughts:
- Apple's got plenty of dough. As of June 30, 2015 Apple owned a balance sheet containing $203 billion in cash and investments. Today, VW had a market cap of just $34 billion. Chump change for Apple.
- Apple's got the dough mostly in overseas accounts. AAPL management has been in a quandary with what to do with its overseas cash. Most of the hoard is held outside the United States. Funds repatriated to the U.S. carry a hefty corporate tax. Apple has been raising cash by selling EU bonds to avoid sending cash back to Uncle Sam. On the other hand, Volkswagen is based in Germany. Buy it and Presto! No tax.
- Purchasing a existing automaker affords Apple advantages. It accelerates production, as manufacturing facilities are in-place. It accelerates customer interface, as VW distribution and dealer networks are in place already. Finally, it offers Apple an inside track into some of the best-and-brightest automotive minds in the business. VW didn't become a premier global automaker with low-rent engineers, production management and marketers. The recent scandal is a management issue, not an engineering / technology flub.
Now some readers may say, "Any automobile company can offer Apple similar attributes." Perhaps some can. However, I counter:
If Apple wants to "buy" automobile production, a dealer network, and experienced automotive engineering talent, there's a very limited shopping list. Poaching talent or buying one-off factories is too slow. Most auto companies don't want to get bought out; and certainly not by Apple. I suspect auto companies prefer "strategic partnership agreements," or perhaps some kind of a joint venture.
For Apple, a straight buyout may be a better approach. Why?
Any kind of a strategic agreement or joint venture, by design, offers Apple automotive physical plant and intellectual expertise (which Apple likely needs), but combines it with shared financial decision-making and profits (which Apple likely does not need). The purchase of an existing automaker could put Apple into the position of calling all the shots, and reaping the profits. In addition, current auto culture is unlikely to be in Apple's interest. Not to mention that joint venture partners can often wear multiple hats: "I'm your best friend today, and your worst competitor tomorrow."
Today, Volkswagen stock is "on sale." The shares are trading at a 60% discount versus market value just 3 months ago.
Another plus: an Apple acquisition of Volkswagen, the biggest automaker in the world, causes no antitrust issues. Regulators will not challenge a tech company purchasing an auto manufacturer.
What's in it for VW?
A shot in the arm. A new start. Embracing the younger generation. Leading edge technology. Being cool. I'm not sure the current Volkswagen is considered cool.
Closing Thoughts and Musings
Apple stock is inexpensive on earnings or cash flow. Volkswagen shares are in the pits. I never buy a stock based upon takeover rumors: real or fabricated. So for me, a spec buy on VLKAY is out. However, AAPL isn't overpriced (ttm PE 12.6x, forward multiple 11.2x, PEG ratio 0.86x), and premising Apple will eventually make a big waves by branching into a new enterprise that combines tech, youth, and "cool," I would be hard pressed to tell someone to dismiss a bid on AAPL.
Some pundits scoff at Apple entering the auto market. A Wall Street Journal article asked the question front-and-center:
On its face, a car seems like a disastrous thing for Apple Inc. to build. Cars are a brutally commoditized, terrifically expensive, generally low-margin industry. Entering the car business is like getting into a land war.
I'm not so sure. The automobile industry is primed for disruptive technology, younger car buyers are changing long-held views on transportation, and Apple is savvy enough to segment the market. I don't envision the Company seeking the low-end commodity market. Apple generates buzz, and caters to aspirational customers.
Kind of like what they've done with smartphones.
I suggest Apple could be better off buying automobile expertise and physical plants outright versus partnering for it. JV partners may have conflicting business interests.
Currently, Volkswagen stock is on-sale. Maybe VW could use a bit of a "white knight." I don't believe Volkswagen faces long-term damage to either its franchise nor its finances.
Apple has the money to do an all-cash transaction; add an uplift and closing costs, it wouldn't make much of a dent in the overall balance sheet. Much of the cash is overseas, thereby the purchase of a German company avoids U.S. corporate taxes on repatriated money.
I believe Apple will gladly play "the long game." For instance, the Company could very likely be a leader in the "self driving" concept, which I contend isn't far-fetched at all. Apple won't do it unless it's done right.
As a matter of fact, who's to say that an Apple Car would look anything like a typical vehicle today? You know, I've often wondered why we often fire up two tons of steel with enough space inside to haul around 5 people and their luggage to drive 3 miles and get a gallon of milk.
To be fair, there's issues. VW management may believe it can weather the storm and be on its way without Apple. Apple may already be in deep with BMW. Currently, Volkswagen stock trades at a 0.52x price-to-book value. Maybe Apple would just see too many problems and go away.
But what if Apple didn't go away?
Just sayin'
Please do you own careful due diligence before making any investment decision. This article is for information only, and isn't a recommendation to buy or sell any stock. Good luck with all your 2015 investments.