Did Didi Cost Apple $1 Billion+ ?

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Is Apple’s Didi investment actually more than $1 Billion?  Today, Apple’s 8-K discloses “strategic investments” of $1.376 billion*.  That amount is $376 million more than Apple’s previously announced Didi investment, also referred to as “strategic” by Tim Cook.

How did Apple spend $1.376 billion in strategic investments? Tim Cook also said, “we have been buying companies, on average, every three to four weeks or so.” Here Tim Cook is referring to purchasing rather than investing in companies, so it can’t be that.

Apple’s $1.376 billion strategic investments, beside Didi, could be related to AR. Tim Cook said todayIt (Pokemon Go) also does show that AR can be really great. We have been and continue to invest a lot in this.”  More should be known once Apple’s 10-K is released.

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*See Statement of Cash Flows for the Nine Months Ended June 25, 2016.

GM Paid $690M Plus for Cruise

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The acquisition price for Cruise paid by GM is $581 million? The reported consideration was $291 million in cash and $290 million in newly issued GM stock. But due to an earn-out of $109 million, the final price could be higher ($693 million) or even something less.

As with other tech startups with many unknowns, the ultimate price depends in part on the completion of non-financial goals.  GM reported the earn-out details in its 10-k released today:

…result in future costs contingent upon the continued employment of key individuals and additional performance-based awards contingent upon the achievement of specific technology and commercialization milestones.

GM set aside restricted stock of $109 million for the earn-out. So maybe, the total acquisition for Cruise will be $690 million. “Maybe” because the total price depends in part on the restricted stock’s value when the earned-out is finally paid out.

On the acquisition date of May 12th, the price of GM’s 3,419,028 shares of restricted stock was $31.30. And on July 21st, GM’s stock price was higher, $32.03. So as of today, the total price is approximately $3 million more or $693 million.

Even that price may be change, because the total amount also depends on meeting technical rather than financial milestones. Some may say: it’s easier meeting a sales target than solving an engineering problem. But if Cruise can do the latter, then the team will be richer.

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The Day Yahoo Died

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October 23, 2005 is when Yahoo acquired a stake in Alibaba. A year before, Google had gone public and, rather than invest in others, Google was investing in itself. Yahoo co-founder, Jerry Yang engineered the acquisition of 46% of Alibaba, but that deal may have marked the end of Yahoo. For afterwards, one company thrived and the other did not.

Google thrived by outspending Yahoo in terms of capital expenditures. Companies, like people, grow by reinvesting in themselves. You can earned more with an education, so you invest money and time in acquiring one. Companies spend money on capital expenditures which allow them to expand their business, so in the future they can receive increased cash flows from operations.

Google spent three, four, five, and finally six times the amount Yahoo was spending on capital expenditures during 2005 to 2010.  Spending only slowed after the Lehman Shock of 2008 for both companies, but Google still spent twice as much as Yahoo as shown in Chart I. In 2005, Google spent $800 million and five year later was spending $4 billion on capital expenditures.

capex)
Source: Annual Reports

It’s difficult knowing where the money was actually going, though.  In its 2005 Annual Report, Yahoo said it purchased “information technology assets to support our expanding offerings, our increased number of users and our international growth.” While in same year, Google disclosed it spent partly for “information technology infrastructure….”

Then a secret, but now more better known, Google was quickly building and leasing lots of data centers. In 2008, Nicholas Carr would explain Google’s technology strategy in the The Big Switch. Google’s then business strategy is even simpler to explain here: build data centers to spend search inquires, attract users, sell ads and then repeat.

Google beat its rivals in search and increased its operating cash flows. In 2005, both Yahoo and Google earned approximately $2 billion from operations. But afterwards, Google’s cash flows increased two, three, four, and five times from the level set in 2005. In 2010, Google cash flows were now $11 billion. By comparison, Yahoo’s cash flows from operations in 2010 were lower, not less than zero, but $1.2 billion as shown in Chart II.

icash flows mage (6)
Source: Annual Reports

Yahoo did not reinvest in its core business in the same way as Google. Yahoo did spend $1 billion and its China properties for a piece of Alibaba. Yahoo’s Alibaba investment has paid off and now represents most of Yahoo’s value. And after Yahoo sell its core business, patents, and other assets, the Alibaba stock will be all that remains for shareholders.

Yahoo could have spent $1 billion in other ways, but did not. Google said back in 2005 that “investments in our business are generally made with a focus on our long-term operations”. Yahoo fell behind long ago, because it didn’t keep up and move ahead. And that all began on October 23, 2005.

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How Innovation Dies at Apple

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Steve Jobs passed away about five years ago and some question whether innovation passed away at Apple too. Due to its secrecy, it is hard gauging the developments inside Apple, unless you’re an employee or have a golden ticket. From the outside, should Apple’s innovation be measured by new products, new ideas, patents, or spending?

Apple and its competitors have increased spending on research and development since 2011. By looking at Chart I below, you can see that the direction is upward for Apple, Alphabet, Facebook, and Amazon. Apple has nearly quadrupled spending on research and development from $2.4 billion in 2011 to $8.5 billion in 2015.

R D Spending
Source: Annual Reports

So all is well? It difficult to determine the success or failure based solely on money spent. There is no direct connection between research and development spending and the bottom line. Ratios could be used such as research costs to total revenue.  But since there is no causality between the money spent and net income, financial ratios may not be the best measure.

Another way to judge Apple is by the number of patents granted. Chart II shows the number of utility patents granted to Apple and its competitors, per year, for 2011 to 2015. By showing the yearly change, rather than the overall total, one can see that Apple is reversing and Alphabet is speeding  ahead.

Patents Granted
Source: Intellectual Property Owners Association’s Annual Top 300 Organizations Granted U.S. Patents

In addition, you can see the emergence of Facebook during the same period. Since its IPO, Facebook has increased research and development spending from $1.4 billion to $4.8 billion. In the same period, Facebook was granted 127, 279, and 374 patents for 2013, 2014, and 2015 respectively.

Amazon is another surprise. Like Apple, Amazon is very private. Rather than not say anything, Amazon obscures its true actions. For example, Amazon does not report its annual research and development expenses. So the amount shown in Chart I above is somewhat misleading. And it could also be misleading to those outside of Amazon.

Amazon reports its research and development as technology and content. Technology includes primarily research and development expenses, but Content does not. Content includes all the costs associated with “category expansion, editorial content, buying, and merchandise selection.” Technology and Content went from $2.9 billion in 2011 to $12.5 billion in 2015.

Since Amazon buries its  research and development expenses, you really know nothing. You do know from patents granted, that something is happening at the on-line retailer. In 2011, Amazon was granted 180 patents and five years later, it was granted 1,136 patents. In terms of patents granted, Amazon has come from nowhere while Apple is slowing down.

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