Apple Acquires Shazam
One of the most recent and commonly spoken of transactions is Apple’s acquisition of Shazam which is about to be completed in the next months. It is already known what the two companies do and how they are related to each other, so a more detailed analysis can be made about the reasons that led Apple to acquire Shazam as opposed to replicating its application and the positive and negative aspects of this deal.
To begin with, Shazam is one of the oldest companies in the world of mobile with strong database and recognition from more than 1 billion users who have downloaded the app. Any effort from Apple to replicate this technology and its tremendous database would take a lot of time with doubtful results. Probably the biggest benefit from Apple’s side is that it will harm competitors as they will be blocked from integrating Shazam to their software and advertising their services through this app anymore. Evidence for this is the decision of the former to make the deal known only after Shazam had been in talks with Snapchat and Spotify.
At the moment, Spotify has around 60 million paying users whilst Apple music has only half of that. Cook has announced that Apple’s goal is to double the company’s services segment within 4 years and the quickest way to do this is by attracting some of Spotify’s customers through a better music platform which would have indirect benefits for Apple TV and IOS apps. After the confirmation of the deal, Shazam was integrated to Siri (Apple’s technology).
In addition, Shazam had already started the launch of a powerful augmented reality (AR) platform which could support Apple in the completion of its own AR system. It is also worth mentioning that Shazam has been granted more than 200 patents related to its technology and after its acquisition by Apple, the latter can own and utilize these patents in a more profitable way.
On the other hand, some of the disadvantages for this transaction could be the great amount of money that Apple pays for this technology compared to the amount it would spend in order to replicate and develop an equivalent database, but this worry can be hedged by the fact that Shazam’s post-money valuation was over $1 billion. As a result, Apple is going to welcome a company of that EV in its financial statements in exchange for just $400 million. Shazam is sure selling for a bargain price!
More precisely, the reason for such a low acquisition price is the low potential of Shazam for long-term development and the sheer numbers of only $54 million in revenues in 2016. Unfortunately, Shazam was not very profitable then, but actually incurred $5.3 million of losses in 2016 which is significantly less than those of previous fiscal years. This improvement was crucial in making Shazam a good acquisition target this year, especially when accompanied with the shareholder’s realization of poor future performance under the existing technology and operating activities, making it willing to accept a noticeable discount on its EV. Calculating a multiple based on its revenues, Shazam gives its shares a valuation metric of over 7.5x, taking into consideration that the EV is captured as well as the $400 million instead of the one billion dollars initially estimated. Also estimating the ratios of RoE and RoA, these numbers are negative as a result of negative profit while the leverage appears quite high with $143.5 million to represent only the amount raised by venture capital firms.
Overall, it can be inferred that Apple’s decision to acquire Shazam could be proved highly beneficial for its operations and be helped in the development of a more sophisticated technology like AR while fighting the competition at the same time.
By Filippos Exarchopoulos.