Carving up Apple

http://www.thedeal.com/NASApp/cs/CS?pagename=CBS&c=TDDArticle&cid=1052340194595


by Joshua Jaffe
Updated 02:02 PM EST, May-12-2003


With sales of its splendid new G4 laptops gaining pace after the phenomenal five-year run of the iMac, Apple Computer Inc.'s shareholders should be beaming. Apple chief executive Steve Jobs, wearing his trademark black mock turtleneck and blue jeans, certainly hoped so when in late April he unveiled the company's much anticipated iTunes software, which allows users to purchase music online legally and affordably.

Most Apple shareholders, however, aren't applauding Jobs' sudden infatuation with the music industry. Nor are they particularly pleased with the company's otherwise moribund business strategy or a stock price that has stagnated for the past year.

What's the problem? Apple has failed to rebuild its flagging software and hardware businesses despite its brilliant marketing campaigns. And now the company's strategic direction appears more desperate than ever as it ponders whether to deploy its $4.5 billion cash hoard to buy and resurrect Universal Music Group, the world's largest music label.

Shareholders reacted to news of Apple's informal negotiations for Universal with ailing French conglomerate Vivendi Universal SA - reported prior to Apple's unveiling of iTunes and then denied by the company - with a sharp share selloff, dropping Apple's market capitalization below $6 billion.

Many close observers of the legendary Silicon Valley company believe shareholders shouldn't be selling the stock. They should be buying it, they say, in order to press the 48-year-old Jobs to split Apple into two separate companies built around its hardware and software lines of businesses, or get new management that will. "Given what their valuation currently is, I think this is something they will eventually have to do," argues Rob Enderle, a research fellow at Giga, a research unit of Santa Clara, Calif.-based Forrester Research Inc. "They have to dig themselves out of the going-out-of-business cycle they are currently in."

Others agree. Several private equity players, requesting anonymity, have considered whether it would be profitable to take the company private in a leveraged buyout. They understand the strategic appeal of busting up the company yet found Apple's cash flow, debt levels and store leases to be insurmountable hurdles to an LBO (see story, page 12).

Some analysts who follow the company, however, believe Apple should take a page from the playbook of personal digital assistant maker Palm Inc., which in 2001 began splitting itself into a PDA operating system company and a PDA hardware maker. That decision is scheduled to culminate in July with the listing of PalmSource, its operating system unit, as a separate company.

Jobs, too, is aware of the appeal of a Palm-like restructuring at Apple, according to sources familiar with the company. They say the Apple CEO has set up another of his famous "skunk works" to examine the pros and cons of a breakup. An Apple representative did not return calls seeking comment by press time.

But the logic is compelling. Splitting this proprietary computer hardware and software maker would enable both units to compete more ruthlessly in today's cutthroat tech environment. A separate Apple software unit would be far better able to challenge Microsoft Corp.'s Windows operating system for market share. And a separate Apple hardware unit would become a true PC maker, not just a maker of Macs, broadening its sales horizon, too.