TIME technology

Apple-Beats: Here’s What Analysts Are Saying

Apple Introduces iPhone 5
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What a difference three weeks can make. Analysts who “struggled to see the rational” behind Apple’s acquisition of Beats when it was a $3.2 billion rumor now think it’s a pretty smart move. “Probably the only smart move within the last 3 years!” according to one Apple skeptic.

Below: Excerpts from the notes we’ve seen so far. More as they come in.

Katy Huberty, Morgan Stanley: Apple beats the service drum.“Subscription music service could make the deal a home run, with every 1% penetration of Apple’s 800M account base equating to $960M of revenue. Apple believes Beats offers the right strategy for streaming music as it leverages both algorithms and 200 human curators to create playlists, which differentiates it from competitors.”

Trip Chowdhry, Global Equities: A smart move from Apple, and probably the only smart move within the last 3 years! “Currently, Beats Music Streaming Service only has 250K subscribers — but with Apple’s power in distribution (iOS Devices and AppStore), subscription to Beats Music Streaming Service can easily grow to 20 million subscribers within the next 12 to 18 months.”

Gene Munster, Piper Jaffray: Thoughts on the now-confirmed Beats deal. “We believe that if successful, adding Iovine and Dr. Dre could help propel Apple into the next level in its content offering, particularly in video, which could pave the way for new products including a television. Finally, given that Beats is the largest acquisition of Apple’s history, we believe it could open the door to other larger acquisitions, potentially around Internet services outside of content.”

Daniel Ernst, Hudson Square: AAPL Beats rhythm and blues. “On balance we are not fans of the Beats acquisition, although, we do not expect a negative market reaction to the news, and we concede Apple Beats holds promise to exceed our very low expectations. As a music-focused premium hardware maker with a budding, well-curated service component, Beats does fit well with Apple, and at $2.6B, the cash deployed represents just 1.7% of the company’s 3/31/14 balance. However, in our opinion even within music, there exists more impactful targets like Sonos or Spotify and moreover so many more targets in a vast array of segments either not, or not well served by Apple today including cloud services, security, commerce/payments, television and games.”

Benedict Evans, Andreessen Horowitz: Content Is King? “Music has gone from being a key strategic lever in the tech industry to an afterthought. The same applies to movie and TV libraries — media has gone from being a choke-point to a check-box, commodity feature than every platform has to offer but where none has any particular advantage… So for a platform owner or device maker, the content you can offer is no longer a strategic asset. Content doesn’t sell devices, because they all have the same content.”

Ben Bajarin, Creative Strategies: Apple, Beats, and Content as Differentiation. “What makes Apple’s products stand out is they are differentiated by hardware and by software. Much of their software runs on no other computers than their own. What if they can bring content into this fold? What if they can acquire exclusive deals, even if exclusive for short time windows, that are only available on their hardware and through their software? Then what if they do release lower cost phones in the $350 range? If you are in China, India, Brazil, Indonesia, and you are a fan of American music, movies, and even TV, would you pay $100 or $200 more for exclusive hardware, software, and content? Again, while I acknowledge the difficulty or ‘moon shot’ of this effort, content (beyond apps) is an interesting differentiator if done right.”

TIME

Tech Looks Like It’s Entering Another Period of Insanity

Fackbook Acquires WhatsApp For $16 Billion
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But are some sky0high prices defensible?

Is the world of tech investing losing its head again? Or are some tech investments worthwhile even at jaw-dropping prices because of the potential for future growth? Such questions crop up now and then, but in the past few weeks they’ve come up with an alarming frequency.

Last month, after Facebook said it would buy WhatsApp for $19 billion, a furious debate broke out over whether the price was insane or defensible. Since then, similar debates have emerged in different areas: most recently, the wildly successful IPO of digital-healthcare startup Castlight; and Intercept Pharmaceuticals, a top-performing stock in the red-hot biotech sector, among others.

There are key differences between these three examples: One is in M&A, another a recent IPO and the third as stock that has traded publicly for a few years. Each operates in a different sector. But they’ve all sparked debates that have a similar dynamic – a disconnect between those who see strategic sense in betting on future growth, and those who say the valuation is unjustified by any logic.

And there seems to be no bridging the disconnect between the two.

Facebook’s acquisition of WhatsApp. Announced four weeks ago, the proposed deal would offer $4 billion in cash and the rest in Facebook shares, which most analysts expect to keep rising for the next year at least.

Why it’s so promising: Facebook needs more must-have apps to remain relevant on mobile. WhatsApp attracted 450 million users with 55 employees and no marketing. Facebook gets better exposure to emerging markets and strengthens its ownership of the photo-sharing market. WhatsApp could conceivably contribute billions to Facebook’s annual revenues. Importantly, Facebook keeps Google from owning WhatsApp.

Why it’s so overvalued: Facebook is paying $345 per employee. For a precedent you have to go back to the dot-com era. Valuing a company on a per-user basis was a desperate metric used in that same era, which didn’t end well. Monetizing WhatsApp faces challenges: Competition is rife (WeChat, KakaoTalk, Kik), and some may undercut WhatsApp’s subscription fees or offer a richer platform of services.

Castlight’s IPO. Founded in 2008, the San-Francisco-based company uses cloud technology to help companies manage healthcare costs more efficiently. Castlight filed to raise $100 million last month, but demand bumped its take up to $176 million. The stock rose 149% to $39.80 on its first day of trading last Friday before settling at $37.25 Monday.

Why it’s so promising: Health care is a notoriously opaque industry, and Castlight is early in creating transparency through cloud software. Its founders hail from RelayHealth (acquired by McKesson), VC firm Venrock and Athenahealth, adding cred on Wall Street. Castlight has a $109 million backlog of contracts not recognized yet at revenue.

Why it’s so overvalued: The company listed at 107 times revenue and now trades at 250 times revenue. (Athenahealth trades at 11 times revenue.) It’s lost a total of $131 million to date. Castlight’s involvement in the cloud and healthcare exposes it to two markets subject to speculative investment.

Intercept’s stock surge. The New York-based developer of drugs for chronic liver disease went public in late 2012 at $15 a share and was trading around $60 a share in early January. After phase II trials of a drug was stopped early because of positive results, the stock has since risen as high as $462 last week, a 577% gain year to date.

Why it’s so promising: The drug treats NASH, a liver condition that can lead to liver failure and that affects an eighth of the US adult population. It’s considered an unmet medical need with no approved therapies. One analyst called the news “potentially paradigm changing” while another said the market could be “bigger than Hepatitis C” with sales as high as $4 billion.

Why it’s so overvalued: Intercept has lost $186 million to date, yet its market cap has gone from $1 billion in January to $8 billion today, and analysts are saying it could rise to $17 billion. The NASH drug has passed a key obstacle but still faces more. The phase II results don’t necessarily guarantee regulatory approval, and long-term side effects could hurt marketing.

It’s important to note that none of these are fly-by-night companies attempting to mislead investors. Each has a well-run business and a promising story to tell. What’s notable is that the market is willing to price each one on a best-case scenario that lies several years down the road. And that’s assuming nothing will go wrong.

No investor wants to be left out of the next big thing. And yet the willingness to invest in sunny, best-case scenarios is something that was absent from the market even a couple of years ago, but is growing more commonplace in 2014. Back then, companies with nine-digit losses couldn’t squeak into the markets. And tech giants like Facebook were focusing on modest acqui-hires.

We’re in a different market now. One where valuations are starting to resemble those of 15 years ago. The difference this time is many of the highly valued companies have a persuasive story to tell. But even a good story can lead to disappointment when it’s priced to perfection.

TIME mergers and acquisitions

AT&T Leaps Into Prepaid Wireless Market

New York City Exteriors And Landmarks
AT&T store on December 31, 2013 in New York City. Ben Hider—Getty Images

The Federal Communications Commission approved the merger of the nation's number two wireless carrier AT&T and prepaid powerhouse Leap Wireless, which runs the Cricket prepaid wireless service

The Federal Communications Commission approved AT&T’s acquisition of Leap Wireless on Thursday. Leap runs the Cricket prepaid wireless service, which has about 5 million subscribers.

With 110 million U.S. subscribers as of the end of 2013, AT&T is the second largest carrier in the U.S. When first announced last July, the merger raised concerns that the acquisition of the popular wireless service could harm public interest. But AT&T has promised to divest spectrum in some markets and to offer low-cost packages comparable to the ones that made Cricket popular. In a SEC filing, it promised prepaid monthly packages for $40 or less for at least a year and a half after the merger.

AT&T’s network currently covers 308 million people across the country, while Leap’s covers 96 million in 35 states, according to ZDNet. The deal will strengthen AT&T’s network capacity in large markets and improve its presence in the growing prepaid market.

[The Verge]

TIME Retail

You’re Going To Like The Way Men’s Wearhouse Bought Jos. A. Bank

Men's Wearhouse Pursues Hostile Takeover Of Jos. A. Bank
Men's Wearhouse and Jos. A. Bank have been negotiating a merger since last October Andrew Burton—Getty Images

Men's Wearhouse is buying rival Jos. A. Bank in a $1.8 billion deal. The merged companies will together have more than 1,700 stores in the United States, with approximately 23,000 employees and annual sales of about $3.5 billion

Men’s Wearhouse announced Tuesday that it is buying its suit-selling rival Jos. A. Bank for $65 a share in cash after months of wrangling between the two competitors, greatly expanding the size of the menswear chain.

After the merger of Men’s Wearhouse and Jos. A. Bank, the two together will have more than 1,700 stores in the United States, with approximately 23,000 employees and annual sales of about $3.5 billion. The deal totals out at $1.8 billion, with the boards of directors of both companies unanimously approving the transaction.

The two companies have been attempting to take each other over for months. Jos. A. Bank. sought to acquire Men’s Wearhouse for $48 a share, or $2.3 billion in a surprise bid in October, but dropped its offer by mid-November. In December, Men’s Wearhouse struck back with $1.5 billion bid that led to the current agreement.

Jos. A. Bank board chairman Robert N. Wildrick the final $65-per-share deal was satisfactory to his shareholders. Jos. A. Bank’s stock has never traded for the $65 per share, and over the past year—its strongest 12 months—it traded between $40 and $60 per share.

“The transaction we are announcing today clearly reflects the success of our efforts, providing a substantial premium over any price at which our stock has ever traded, including a 56% premium since our interest in Men’s Wearhouse became public last October, and allowing our shareholders to receive immediate consideration for their holdings,” Wildrick said in a statement.

As part of the deail, Jos. A. Bank agreed to scrap its agreement with Everest Holdings LLC to buy subsidiary Eddie Bauer.

Despite the contention between the two companies, Men’s Wearhouse CEO Doug Ewert struck a conciliatory tone. “All of us at Men’s Wearhouse have great respect for the Jos. A. Bank management team and are eager to work with Jos. A. Bank’s talented employees,” he said.

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