Beats finalised

Ok, it finally happened, Dr Dre's Beats were bought by Apple for 3 billion Dollars, 2.6 billion now and the other 400 million dollars that will vest to the shareholders over time. And in the deal, the two founding members, Dr Dre himself, and Jimmy Iovine will work for Apple. So how much is 3 billion Dollars? Well, if you are Lesotho, it is more than your total annual economic output. Genuine. But if you are Apple, it is three weeks worth of cash flows. And to also put 3 billion Dollars into perspective, Apple in their last quarter managed to increase cash and cash equivalents by 4.690 billion Dollars. So even if this is the largest acquisition that the company has ever done (yes, ever), they have more than enough cash to add to peripheral businesses that will add further value down the line.

Music is at the core of all of us, we hear our favourite beats and see flashing lights and somewhere deep in our brains we trigger a fire and drum scene. And then most unfortunately we think that we are somehow able to dance, most of us are rubbish. But this is what this transaction is all about, music, the two personalities involved are well known and respected in the music industry. In the release, quite predictably, Iovine is quoted as saying: "I've always known in my heart that Beats belonged with Apple." Ha-ha, that is real funny, of course he would say that now, but I guess at some stage realising value from his innovation was the "right thing to do".

If you are a die hard Idols fan, you might recognise Jimmy Iovine as being a mentor on the program. Anyone who has produced and worked with John Lennon, Bruce Springsteen, Tom Petty, Dire Straits, The Pretenders (the list goes on) can call themselves a legend. He has a Grammy, he co-produced the Eminem film 8 Mile. He is a legend in the broader industry. I am pretty sure that he has lots to add at Apple. In fact he has been adding to Apple for a while now, in the release Apple to Acquire Beats Music & Beats Electronics it notes that Iovine "has been an instrumental partner for Apple and iTunes^R for more than a decade."

So whether Apple bought the business for the devices, the streaming music service or the people, or all three, what matters is that the company has signalled their intentions that they are stepping outside of their comfort zone. I think that too much has been made about their biggest acquisition ever by Apple. Apple has a market cap of 537 billion Dollars now. This is 0.55 percent of their market capitalisation. In our piece titled Keen for the Beats, there is a FT link to the Apple transactions, the previous biggest being a 400 million Dollar transaction with Next. An archived (digital!!) article headline suggests it was more than the computers that Apple were after: Apple acquires Next, Jobs.

Back on the 20th of December 1996, Apple's share price was 23.5 Dollars. You can actually find the Apple annual report from 1996 online, I wanted to check how many shares were in issue back then. The answer is right at the beginning of the 10-K form: 124,552,511 shares of Common Stock Issued and Outstanding as of November 29, 1996 So, the market cap of Apple was 2.926 billion Dollars, by that measure. Apple did do a stock split (2-1) in 2000 and then again in 2005 (2-1), the number of shares in issue would be closer to 500 million and not the 900 odd million that there are now. Huh? More investigation is required there on my part. Anyhows, the point that I was trying to make there was that a 400 million Dollar purchase on a 2.926 billion Dollar market cap is roughly 13.6 percent of their market cap at that time. An equivalent deal nowadays, relatively speaking that is, would see Apple make a 73.4 billion Dollar purchase. I do think that in this case historical context is worth noting.

Having had time to mull all of this through and to read the release carefully, plus drawing down on the history of the company, I think that this fits nicely. Music monetisation on the beautiful devices. Music cultures and genres might always be evolving, you might think that your music is timeless and the current crop are bubble-gummy, but that means many more opportunities for the company. We continue to hold and add to what is an amazing business with many opportunities. I still cannot believe that Lesotho has a GDP of less than what Dr. Dre's beats is worth.