When Steve Jobs passed away in 2011, he owned more shares of Disney (DIS -1.09%) than he did of Apple (AAPL -0.56%). He had gained that stake through his sale of Pixar to Disney in 2006. Since then, many people have dreamed of a merger between the two iconic American companies.
Disney CEO Bob Iger floated that idea in his 2019 memoir and even claimed in a 2021 interview that Jobs would have supported a merger if he had lived. Last November, an unnamed insider claimed Iger could sell Disney to Apple, but Iger denied those rumors. Needham analyst Laura Martin recently revived that idea in a research paper that claimed an acquisition of Disney could easily boost Apple's valuation by 15% to 25%.
Apple is one of the few companies in the world with the finances to pull off that massive deal, but would it actually make any sense? Let's review three reasons Apple might buy Disney and three reasons it would be a terrible idea.
Image source: Getty Images.
Three reasons Apple could buy Disney
Apple could buy Disney for three reasons: It would expand its services segment, reduce its dependence on the iPhone, and potentially generate synergies in terms of marketing, bundling strategies, and the collection of customer data.
Apple ended its latest quarter with 935 million paid subscriptions across all its services, which include Apple TV+, Apple Music, Apple Arcade, Apple News+, Apple Fitness+, and iCloud+. It bundles those services in its Apple One subscription.
Acquiring Disney would strengthen that ecosystem by adding Disney's 235 million streaming subscribers (162 million on Disney+, 25 million on ESPN+, and 48 million on Hulu) to Apple TV+. Additionally, Apple Music would gain more songs, Apple News+ could be tightly integrated into ABC News, and Apple Arcade could potentially get more Disney, Marvel, and Star Wars games.
That merger might solve Disney's biggest problem: the widening losses in its direct-to-consumer streaming division. Merging its streaming ecosystem with Apple's would reduce its own content production, infrastructure, and marketing costs.
Last quarter, Apple generated 18% of its revenue from its services segment, which houses its subscriptions, App Store sales, and other services. But it still generated 56% of its revenue from the iPhone, which will likely face diminishing returns with longer upgrade cycles. That percentage would drop to 47% if we combined Apple and Disney's latest quarterly numbers.
As for the bundling opportunities, Apple could sell Disney-themed products; promote its products in Disney's movies, TV shows, and theme parks; and even provide its Apple One subscribers with special discounts for Disney's theme parks and resorts. It would also gain access to Disney's goldmine of customer data, which could guide Apple's development of future hardware, software, and subscription-based products.
Three reasons it's a terrible idea
Those possibilities are tantalizing, but the acquisition would be a bad idea for three reasons: the hefty price tag, the acquisition indigestion, and the mismatched operating margins.
Disney currently has an enterprise value of about $210 billion. An acquisition premium of 30% would boost the value of that deal to more than $270 billion. Apple ended its latest quarter with $165 billion in cash, cash equivalents, and marketable securities, so it would likely need to take on more debt or cover the rest of the deal in stock.
That also means Apple would likely need to pause its big buybacks. It has already reduced its outstanding shares by 40% over the past decade, and suspending those shareholder-friendly buybacks in favor of a massive media acquisition could be poorly received. Apple could also purchase several smaller media companies -- including Paramount, which has an enterprise value of $29 billion, or Warner Bros. Discovery, valued at $78 billion -- to expand its services segment without inheriting Disney's theme parks and resorts.
Acquiring Disney would also complicate Apple's simpler business model of selling premium hardware devices and locking in its customers with high-margin subscriptions. A comparison of Disney and Apple's gross and operating margins over the past five years, which clearly reflect the impact of COVID-19 and Disney's loss-leading expansion into the streaming market, indicates that acquisition could significantly reduce Apple's margins:
Data source: YCharts. TTM = trailing 12 months.
Lastly, Apple's takeover of Disney would likely face a lot of opposition from antitrust regulators. The two companies operate in different sectors. However, the combination could give them unfair competitive advantages against Apple's hardware and software competitors and Disney's competitors in the media and theme park markets. Apple could get so distracted by those regulatory challenges that it might impact the development of its new products and services.
It's doubtful this mega-deal will ever happen
A merger between Apple and Disney is a fascinating idea, but it doesn't seem realistic. For now, it makes more sense for Apple to expand its ecosystem with mixed-reality headsets and software for connected cars than it does to acquire the world's largest media and theme park company. It would be smart for Apple to sign some content and marketing deals with Disney, but it's irrational for the tech giant to swallow up the whole company.
Leo Sun has positions in Apple, Walt Disney, and Warner Bros. Discovery. The Motley Fool has positions in and recommends Apple, Walt Disney, and Warner Bros. Discovery. The Motley Fool recommends the following options: long January 2024 $145 calls on Walt Disney, long March 2023 $120 calls on Apple, short January 2024 $155 calls on Walt Disney, and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.
Sure, I'm well-versed in business, mergers, and acquisitions. The article touches on the potential merger between Apple and Disney, examining the feasibility, advantages, and drawbacks of such a monumental deal. Let's break down the key concepts addressed:
1. Stake Acquisition and History:
Steve Jobs' ownership of more Disney shares than Apple's, gained through the sale of Pixar to Disney in 2006, demonstrates his significant involvement in both companies. This historical context suggests a deep understanding of the foundational relationship between Jobs, Pixar, Disney, and subsequently, Apple's interests.
2. Mergers & Acquisitions (M&A):
The speculation around a potential merger between Apple and Disney involves strategic considerations. Analyzing Disney CEO Bob Iger's memoir and interviews, alongside financial expert opinions (like Needham analyst Laura Martin's projections), indicates an understanding of the intricacies and complexities of M&A deals, especially within the tech and media industries.
3. Business Strategy & Diversification:
The analysis delves into the strategic advantages of such a merger. It highlights how the acquisition could expand Apple's services segment, reduce iPhone dependence, create synergies in marketing, bundling strategies, and customer data collection. This showcases a grasp of corporate strategy, diversification, and revenue stream optimization.
4. Financial Implications:
The financial aspects, including the cost of acquisition, potential debt burden, impact on Apple's buyback programs, and the effect on operating margins, display a comprehensive understanding of financial implications in large-scale acquisitions.
5. Regulatory & Antitrust Challenges:
Anticipating regulatory challenges and the potential impact on competition underscores an awareness of the legal and regulatory landscape governing mergers, particularly concerning antitrust regulations and market dominance.
6. Market Analysis & Future Projections:
Lastly, the article assesses the likelihood of the deal happening and offers insights into alternative growth strategies for Apple, reflecting a holistic view of market trends, technological advancements, and strategic foresight.
These concepts are pivotal when evaluating corporate strategies, financial implications, regulatory hurdles, and market dynamics in potential mergers and acquisitions.
