Does Apples purchase of PA Semiconductor suggest a shift in Apples Mergers and Acquisitions Strategy

Inside Apple and PA Semi Part 2: The Macro Perspective

Seth Gilbert, 04-28-2008

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apple m and a Looking at Apple’s purchase of Palo Alto Semiconductor (PA Semi) opened the door to two core questions. One, the micro look, questioned what Apple’s specific interests in the company were. Why did they make the purchase? Part 1 of this two part article series delved into that question in detail. The second question is a recurring issue and more macro in focus: does this small scale purchase give any indication of a change in Apple’s M&A strategy?

When it comes to the official company line Apple spokespeople say, “Apple buys smaller technology companies from time to time, and we generally do not comment on our purposes and plans.” Like most companies, they give little guidance about how the company may plan to use (or not use) any cash reserves.

The thing about Apple is: they have a massive cash war chest. In December, for example, Fortune reported that Apple’s cash stock, then at about $15.4billion, exceeded the reserves of HP and IBM. In fact, only Cisco and Microsoft had horded more. Now, as of the most current earnings period, cash has ballooned to $19.4b.

Since, as a matter of practice, Apple also doesn’t pay dividends. And similarly, since so far, they haven’t hinted at any major (large scale) plan for a stock buyback either. (Between 1999 and December 2007, only in the ballpark of $215 million went to buybacks). The question that gets asked is what will Apple do with all cash?

On the one hand, keeping it around provides tremendous flexibility but, at some point, investors and analysts start questioning whether some of it should be allocated toward longer term investment, whether it’s being wasted without alternate deployment. How much cash is too much?

Historically, Apple’s practices have emphasized buying early stage companies that bring product and talent that Apple can nurture and mold internally to the end product of their choosing. PA Semi was a little more mature but, to a large extent, it still fits with that perspective.

Whether the buy proves for engineering, or driven by the existing chip products, nothing directly indicates a change in practice. On the other hand, could Apple accelerate the pace of small transactions, or even consider something larger, given all that cash? Of course.

Adding to the possibility of more are questions surrounding a recent hiring decision. Earlier this month, Apple hired former HP attorney Charles Carnas to head up the corporate sector of its internal legal team. Carnas had been Deputy General Counsel at HP. In that role, he became known partly as a merger and acquisition specialist. He oversaw HP’s $4.5 billion dollar purchase of Mercury Interactive in 2006. He also handled corporate securities issues in the $25billion purchase of Compaq in 2001.

Carnas’ addition to Apple’s legal team is by no means a flashcard to future M&A plans. There is surely enough securities and general corporate legal work to warrant a highly experienced division head; which he clearly is. Further, if M&A was on the agenda, capable outside counsel could surely shoulder the burdens. On the flip side – he’s considered a legal heavy hitter, a guy who knows his way around asset purchases and acquisitions.

Looking to the crystal ball, it’s most likely the hiring of Carnas is just a sign of Apple’s maturation. The role had been empty since 2000. The addition was only a matter of time. Back to M&A efforts though? I wouldn’t be surprised to see more deals, probably small, over the coming year. One or two here, a few there.

Apple’s innovation may be largely organic, but that doesn’t mean they can’t, or won’t buy some fertilizer every now and again.

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Inside Apple and PA Semi Part 2: The Macro Perspective

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