Assessing Potential Digital/Mobile M&A Ideas

by: Scott Sacknoff

I recently engaged in a consulting project designed to look at the digital/mobile world. As part of the research we discussed various trends in the sector, the positioning of firms, and what we saw as the strategic position or intent of some of the larger players. Based on this information, we speculated on what deals, yet to be made or announced, might warrant consideration as well as those that we really didn't see a fit whether because of strategic or financial reasons or because of the internal history of the firms. The combinations addressed below include some that pop up every now and then among analysts or speculators as well as some ideas that we generated based on implied strategy.

Typically, on the various investment forums and blogs, discussions on prospective mergers and acquisition (M&A) activity usually fall into one of four categories-speculation by a bull whose sole agenda is to generate interest in their holding and hopefully push up their stock; news surrounding the leak of an impending deal; an after-the-fact discussion where many people think that they should have seen that one coming, or the fourth, idle speculation. This is the latter; I have no insider knowledge and while I own a few of these stocks in my personal portfolio (Apple and Sirius XM), I hold neither for their M&A prospects.

Microsoft (NASDAQ:MSFT) acquires Netflix (NASDAQ:NFLX): Combine with Xbox and create a fully integrated digital portal to the home that can be engaged for all facets of entertainment. With a $14 billion market cap and a takeout price of around $25 billion, Microsoft has the cash available to do this and a large acquisition by the firm would not be a surprise.

Apple (AAPL) acquires Netflix: Combine with Apple TV and iTunes for the same rationale. Apple, as we know, has the cash, although large deals have historically not been of interest to the firm. The key depends on what undisclosed issues the firm has in developing Apple TV and what its ultimate goal for the product is. Though unlikely, the bigger the issues, the more likely they are to at least consider the possibility of integrating an outside service.

Sirius XM (NASDAQ:SIRI) and Netflix merger: "Video and audio --- anywhere at any time". This would be a great marketing pitch to consumers. Both firms follow the same subscription business model and combined, they'd be a major entertainment delivery player with substantial free cash flow. The deal would essentially have to be structured as a merger of equals as neither company could afford the other. On the downside, Sirius has not expressed any public interest in offering video nor Netflix, radio.

Apple buys Sirius XM: The Sirius XM bulls tend to throw this one out there whenever the price corrects lower for a few days. Although, new radios that enable you to listen to music and buy with a single touch would be a major benefit to Apple's iTunes store, the firm could do this with a business deal not an acquisition that would cost upwards of $40 billion, perhaps, to get done.

Apple buys BlackBerry (BBRY): Another deal I've seen bandied about but I don't see happening. Although it would give Apple a private secure network and an expansion into the corporate world, it is unlikely that Apple would want to use software outside of its own ecosystem.

Sirius XM buying Iridium (NASDAQ:IRDM) or Globalstar (NYSEMKT:GSAT): A deal with either satellite communications firm would give Sirius XM additional orbital spectrum and a 2-way communications feature which could be used to offer telematics to the car; an area of interest that the firm has stated. Instead of providing internet access, maps, restaurant suggestions, etc. using the recently announced AT&T deal, they could have their own private network pipeline to accomplish this. Keep in mind that it has been estimated that the OnStar service provided by General Motors (NYSE:GM) generates roughly $1.5 billion in annual revenues. Revenues generated by offering accident and concierge services through all vehicle manufacturers could easily pay for the deal and further cement the role of Sirius XM and the automobile. As an added bonus, both Globalstar and Iridium generate revenues for communications services primarily outside the United States and so the bandwidth needed by Sirius XM inside the U.S. is currently underutilized. Both satcom firms have a market cap of around $1 billion including debt and equity, making the deal affordable based on current Sirius XM cash and cash potential.

BlackBerry acquiring Iridium or Globalstar: Historically, the firm offering the BlackBerry handset focused on the enterprise market and highlighted the security of their network. A purchase of Iridium or Globalstar and the creation of a dual-mode phone (one that could be used with conventional cellular networks as well as with a satellite-based one) could re-establish their place in the mobile device / network universe among business users and world travelers seeking security and global access. The reduced market cap and liquidity of the firm could present an obstacle to expanding via acquisition

Disclosure: I am long AAPL, SIRI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.