Apple: "[S]upplying music to customers may be its future"

[NaegeleWDC at aol.com]

Since many of you may not subscribe to the Wall Street Journal online, I decided to include the following article that I believe is quite interesting.

Best wishes to all,

Tim Naegele

www.naegele.com

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April 11, 2003 1:29 p.m. EDT
 
Apple May Enter The Music Biz, Strikes Bad Note In Mkt

By DONNA FUSCALDO
Of DOW JONES NEWSWIRES

NEW YORK -- Although it's unclear whether Apple Computer Corp. (AAPL) is indeed willing to plunk down as much as $6 billion to buy Vivendi Universal's (V) Universal Music Group division, one thing is for sure: a deal of that magnitude would not be well received by Wall Street, as was evident in the stock's decline Friday.

Earlier Friday, the Los Angeles Times reported that Apple has been in talks to buy the music company for months and that it may offer $5 billion to $6 billion before Vivendi's April 29 board meeting. The newspaper cited sources it did not identify.

Following the report, shares of Apple sunk more than 7%, to $13.26, setting a new 52-week low, on heavy Nasdaq volume of 9.9 million shares. Average daily volume is 3.9 million shares.

A spokeswoman at Apple declined to comment.

While an acquisition of Universal Music wouldn't be too much of a stretch given Apple CEO's Steve Jobs' experience with Pixar (PIXR), an animation studio he bought for several million dollars back in 1986 and the company's belief that digital music will eventually be a big business, industry watchers questioned whether an acquisition of $5 billion to $6 billion would make sense financially for a company struggling in its own core business.

"The idea of Apple paying $5 billion to $6 billion in cash and stock for anything is scary," said Joseph Beaulieu, an analyst at Morningstar, who doesn't own shares of the company. Apple, which only has $4 billion in cash, would be diluting ownership in its computer business for the one industry that is having more trouble than computers, he added.

Indeed, the record industry has been reeling from slower growth because of digital file sharing over the Internet and the overall lackluster economy. Vivendi has been trying to sell some assets and raise roughly $7 billion this year after barely staving off bankruptcy in 2002.

Apple, too, has seen tough times and could face stormier waters in the future as computer and software upgrades get pushed out even longer. But the company has had success with its iPod MP3 player and a music service to complement that could be a winner with MAC users and mesh with its strategy to offer services over the Internet, said industry observers.

"If you look at some of the public statements about the direction of the company, Apple is racing to be at the center of the media world as well," said Mike McGuire, an analyst at GartnerG2. "If you believe in the notion of content convergence...it makes sense over time."

While McGuire also said an acquisition of that size would be a hard sell to Apple shareholders, he pointed to Sony Corp. (SNE) as another example of a company that not only makes computer hardware, but has a record label and a movie studio. He noted it would be a gamble, but if Apple was successful, the company could potentially make a lot of money over time.

Still, for Wall Street watchers who take a more pragmatic view, many question the logic behind the deal, if it is indeed true.

"There does not appear to be any synergies between a music company and a PC company, even one as innovative as Apple," said Michael Hillmeyer, an analyst at Merrill Lynch in a research report. "We do not see the advantage of technology companies owning both a platform and content and believe companies are run best if they can focus on one or the other."

And even though the stock is at a new low Friday, Hillmeyer, who does not own shares of Apple, said it could trade even lower if a deal is announced.

"For the past several years, Apple has been unable to increase its market share in PCs, and the company has recently been running at an operating loss. " said the analyst. "In our opinion, management's first priority should be to fix these problems."

Apple's PC market share stands at less than 3%.

Merrill intends to seek an investment banking relationship with Apple.

By Donna Fuscaldo; Dow Jones Newswires; 201-938-5253; donna.fuscaldo at dowjones.com

URL for this article:
http://online.wsj.com/article/0,,BT_CO_20030411_003943,00.html

Updated April 11, 2003 1:29 p.m.

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