For Hints at Apple's Future Plans, Read Its Shopping List

There is a really good reason why the stock price of companies making significant acquisitions generally decline, no matter how competent or well-regarded the acquirer: because as many as 65 percent of acquisitions and mergers fail to achieve their stated financial and operational goals.

Apple is well aware of that sad history, which is why it has focused on smaller acquisitions whose people, product or service can enhance Apple offerings. This strategy takes the focus off the 'big bet' and places it where it should be: on the company's ongoing efforts to dominate those areas in which it is already committed or in extensions where it believes it has an opportunity to meet its established financial and market-oriented goals.

The challenge the company faces is as much reputational or aspirational as it is practical: investors and customers have come to believe that Apple produces magic every couple of years. So when it fails to deliver an astounding new product or feature, there is a sense of let-down among the faithful in its customer base and a sense that its best days are behind it from the financial community.

That these attitudes are wrong or false or badly misguided matters not a whit. Beliefs die hard and cults are particularly prone to cycles of optimism which can quickly crater into depression when predicted outcomes are not forthcoming.

Apple's recent acquisitions suggest it is maintaining its focus on mobile technology. To the extent there is a specific area of interest, playing catch-up in mapping seems to be one. But over the history of the enterprise, Apple has acquired people ('acqui-hires') or new product concepts or services which it blends into its existing teams and operations to enhance them, not to create an entirely new vision from the outside. It has worked well to date so the real issue is why so many people question the strategy. JL

Brian Chen reports in the New York Times:

“They’re pre-emptively investing in areas where they think there are opportunities to grow,”

One company used sensors to read body movements. Another recommended TV programs. Several others offered location and mapping services.

All of them had at least one thing in common: They were among the more than 20 relatively small companies Apple says it has bought within the last 15 months.

As fellow tech giants have reached billion-dollar deals in recent years to add significant new arms to their businesses — like Facebook buying WhatsApp for as much as $19 billion, and Microsoft buying Nokia’s handset business for more than $7.1 billion — Apple has ventured down a different path.

The company has avoided jaw-dropping takeovers in favor of a series of smaller deals, using the companies to buttress or fill a gap in products that already exist or are in development.

Still, in the past few years, Apple has gradually increased its overall spending on these acquisitions. In the last quarter, for instance, Apple spent $525 million on acquisitions, nearly double what it spent in the same period a year ago.

And while the deals may be small — particularly given Apple’s nearly $160 billion cash hoard — they offer a window into where the secretive company is headed and which products and services it is trying to build or improve.

Apple’s biggest acquisition last year was PrimeSense, a company with about 150 employees that Apple bought for $300 million to $350 million, according to reports. PrimeSense developed sensors that helped Microsoft let Xbox owners control games using body movements, and some analysts say Apple could eventually apply PrimeSense’s skills and technology to a television set. Apple also bought Matcha.tv, a service that recommended things to watch on TV, another acquisition that signals its strong interest in the living room.

And Apple’s purchase of location data services like Locationary, HopStop and Embark suggests a steadfast interest in Internet services — especially mapping, where Apple has been harshly criticized for lacking the competence of its competitors Google and Nokia.

Filling Out the iPhone

Apple has acquired several companies in recent years whose technologies had potential value for its smartphones.

• 1

  2005

  FingerWorks enabled multitouch screen control, like swiping.

• 2

  2008

  PA Semi designed chips that consumed very low amounts of power.

• 3

  2011

  Anobit offered a technology that increased the speed and performance of memory.

• 4

  2012

  AuthenTec developed sensors that read fingerprints for security purposes.

• 5

  2013

  Embark, one of several recently acquired mapping companies, provided public transit information.

Photograph by Sonny Figueroa/The New York Times

“They’re pre-emptively investing in areas where they think there are opportunities to grow,” said Ben Bajarin, a consumer technology analyst for Creative Strategies who follows Apple. “Without doubt Apple is a bit more focused and lean in their approach and disciplined about the things they buy.”

But as the growth of Apple’s profit has slowed in the past couple of years, some pundits and analysts have called for the company to break into other markets and create new revenue streams through a game-changing deal. Investors and analysts have suggested that Apple should buy Tesla to build cars, Facebook to get into advertising, Netflix to get deeper into the entertainment industry, and even Yahoo to get into the search business.

Apple declined to comment for this article, but none of those possibilities appear close to coming true.

Still, Timothy D. Cook, the company’s chief executive, has said in the past that Apple would have no problem paying billions for another company if it would help Apple make more high-quality products.

And the company is well aware how a blockbuster deal can help. In 1996, Apple acquired NeXT, the computer company founded by Steven P. Jobs after he had been forced out of Apple, largely to bring Mr. Jobs back to the company. It turned out to be one of the most transformative tech acquisitions in history: With Mr. Jobs back at the helm, Apple rose from near-bankruptcy into a dominant company.

But in general, spending huge amounts of money on a buyout comes with major risks, said Brent Thill, an analyst for UBS AG, a financial services company that has clients in the tech industry.

For one, the founders of an acquired company — the star talent who receive the most money in a high-paying acquisition — often tend to take the money and run to another new venture. For another, there can be cultural disagreements: A small company that is focused on introducing new technologies may not line up with the interests of its owner, which are to rake in greater profit.

Also, when a small company merges with a bigger business, it becomes less nimble because it is tied to legacy technologies of a larger corporation, and it can no longer innovate as quickly to keep up with competitors.

The history of the tech industry is littered with big deals that turned out poorly. In 2010, Hewlett-Packard bought Palm, the struggling mobile device maker, for $1.2 billion — and shuttered Palm’s operations after releasing the TouchPad, a tablet that was only on sale for about seven weeks before it was killed.

Similarly, Google bought the legacy handset maker Motorola Mobility for $12.5 billion in 2012 and, after sales of its first flagship smartphone were disappointing, reached a deal to sell it to Lenovo for $2.9 billion.

“A lot of the tech acquisitions, in my opinion, have gone way off the tracks,” Mr. Thill said.

Apple has kept the stakes low in recent years. Several of the companies it has bought had as few as one or two people, like SnappyLabs, a one-man developer of a camera app. The founder, John Papandriopoulos, an electrical engineer, had developed an app to make the iPhone’s camera take high-resolution photos at a faster frame rate than Apple’s built-in camera software. Apple bought the company this year and made Mr. Papandriopoulos a software engineer.

These tiny acquisitions, made in large part to add the skills of an individual as much as the company, are known as acquihires in Silicon Valley. Most other major tech companies make them frequently as well. Facebook has been especially keen about buying small companies, like when it acquired Beluga, a group messaging app, to improve Facebook’s messaging services, and when it bought Push Pop Press, a digital book maker, to make its newsreader Paper.

When Apple buys a start-up with more than a couple of people, it is often looking for groups with specific skills who work well together as a team, according to a person who worked at a start-up Apple acquired last year, who spoke on the condition of anonymity because he was not authorized to speak to the press. Apple then takes these small teams and assigns them to new projects or pairs them with older teams at Apple.

Other deals are made in an effort to quickly blend new technology into existing products. For example, its 2008 purchase of PA Semi, a chip maker, helped Apple design more advanced processors for iPhones and iPads. And its 2012 acquisition of AuthenTec helped enable the fingerprint-sensing technology that eventually wound up in new iPhones.

Other deals are clearly part of Apple’s effort to play catch-up in one particular area: maps.

In 2012, Apple updated the built-in maps software for its mobile devices to replace Google’s mapping data with its own. Apple’s maps, which were lackluster compared with Google’s, quickly drew scrutiny, and Timothy D. Cook, Apple’s chief executive, issued an apology.

To help the company catch up, last year it bought Embark and Hopstop, which provide public transit directions, and WiFiSlam, a company that provided maps for indoor areas. Apple in previous years acquired three other mapping companies: Placebase, Poly9 and C3 Technologies. 

“Maps was a place where they did a lot of acquisitions, and that was a product that came out very flat,” said Maynard Um, a financial analyst for Wells Fargo. “They had the option to invest organically to get that product up to speed or go out and acquire other things.”

But just as those acquisitions suggest areas where the company is trying to catch up, others offer strong hints about new areas where the company is aiming to be a leader.

One of those deals was reached with PrimeSense, the chip maker that makes 3-D sensors. Although the company’s technology has so far been used mostly for applications on a TV, and Apple would likely look into similar uses, Mr. Bajarin of Creative Strategies said he expected Apple to look far and wide for other uses of the technology. Possible options, he said, could include things like turning the iPhone’s camera into a 3-D scanner, which could send images to be reproduced by a 3-D printer, for instance.

“Apple has historically never done anything because someone told them to do something,” Mr. Um said. “They do what they think is right and they go down that path.”