COLUMN-Cheap vs affordable, Apple edition: James Saft

Thu May 29, 2014 4:46pm EDT
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(James Saft is a Reuters columnist. The opinions expressed are his own)

By James Saft

May 29 (Reuters) - Apple's $3 billion purchase of headphones and music business Beats shows exactly how foggy our thinking about the distinction between 'cheap' and 'affordable' has become.

At first glance the deal, which values Beats at about three times more than when it sold a roughly 50 percent stake in itself to the Carlyle Group in September, appears to be at a very rich valuation.

And yet in analyzing the deal, media and analyst reports lay stress on how the deal is only about 0.5 percent of Apple's massive market cap. Or better yet, that the $2.6 billion cash portion of the deal is only 1.7 percent of Apple's $151 billion cash hoard as at the end of March.

Seriously, people, that's how percentages work: if you take a large number like, say, $3 billion and compare it to a very large number like $151 billion you will come up with a small percentage. That does not imply, however, that because one is small in comparison to the other it is cheap or even a good deal, only that it is affordable.

This kind of thinking is rife in the markets for tech assets which are bubbly, and may really only demonstrate that things are out of whack.

Following the announcement of Facebook's $19 billion acquisition of WhatsApp we saw some similar reasoning.

Benedict Evans, of Andreessen Horowitz, a Facebook investor, said in a blog post the correct question was not about the $19 billion sticker price but rather "is this worth 10 percent of Facebook?"   Continued...