Friday, September 01, 2006

And Simon Will Get Back Together With Garfunkel.


Is an Apple-Sun merger in the works?

Commentary: Why Apple really put Google's Schmidt on board


So reads the breathless this-could-be-big MarketWatch headline above a column by John Dvorak, the old-time PC Magazine columnist whose musings on the state of the computer industry used to be followed closely by anybody with an interest in the business.

That was up until around, oh, 1984 or so, when Dvorak—a longtime Apple-basher—dismissed the new-fangled invention called a “mouse,” which Apple had begun shipping with its machines, by saying “There is no evidence that people want to use these things.”

(Yes, kids, it’s true: computers used to be controlled by keystrokes. Ask your Mom or Dad about the “F” keys at the top of your keyboard.)

There are few computer-related innovations more revolutionary than the mouse—which was not developed by Apple but rather by the poor shlubs at Xerox PARC (Palo Alto Research Center), who invented a whole bunch of cool stuff, including the graphical user interface (ask your parents about that, too, kids) and Ethernet, without making a dime for themselves or Xerox.

Legend has it that Steve Jobs, on a tour of PARC, saw the “mouse” in its primitive stages, grasped its significance, and made it happen. Nowadays, of course, a personal computer without a mouse—what Dvorak dismissed as “these things”—does not exist.

In any event, for reasons that escape me, the world still pays attention when Dvorak produces one of his deliberately attention-getting columns, as it did with his “Apple-Sun” merger piece this week.

Let’s examine Dvorak’s evidence for making the case that, as he wrote, “Schmidt [Eric Schmidt, the Google CEO who recently joined the Apple Board of Directors] may have been brought in as the set-up pitcher for what may finally be the often rumored merger between Apple and Sun.”

Dvorak’s Exhibit A: Eric Schmidt used to work at Sun.

His [Schmidt’s] executive training began at Sun and he is still close to the company and its founders. Being the CEO at Google, a somewhat goofy high-energy creative company, should enable him to handle the Apple side of things. Nothing could be harder to manage than Google.

Think about this for, oh, thirty seconds—as Mr. Dvorak apparently did not.

Eric Schmidt is a guy who for one brief shining moment after leaving Sun had one of the biggest stacks of chips at the high-tech poker table, when he was CEO of Novell during its late-1990 glory days. Then Microsoft came along and destroyed Novell’s networking franchise in about as much time as it takes to say “I call.”

After Schmidt spent what must have seemed like a couple of decades, but was in fact only a year or two, missing earnings, laying off engineers and taking hits from Wall Street’s Finest, he left Novell, took his few remaining chips and went all-in by taking a job as CEO of a funky little search engine called Google.

And as everybody including Dvorak knows by now, Eric Schmidt drew an inside royal straight flush on the river card at the final Texas Hold ‘Em table at Binion’s. For one thing, he's a billionaire; for another thing, he runs what many people think is the coolest, most revolutionary, and most zealously missionary technology company in the world right now.

So Eric Schmidt is going to give up all that (excepting the billion dollars) in order to figure out which software engineer from Sun should get which cubicle in Cupertino?

I don’t think so.


Dvorak’s Exhibit 2: Apple’s stock price is high, Sun’s is low.

As of this writing the two stock prices have never been more skewed, making the deal attractive to Apple.

It’s true that Apple’s $50 billion market valuation (net of cash) is more than triple Sun’s $15 billion market value.

But Apple is, in fact, profitable, while Sun is not. So whatever Dvorak means by “the two stock prices have never been more skewed” (and I think he means one is simply larger than the other), Sun’s stock is in fact far more expensive than Apple’s.

So Jobs would be better off buying Apple’s own stock than buying Sun’s operating losses, whether or not one integer happens to be larger than the other in the stock tables.


Dvorak’s Exhibit 3: It seemed like a good idea 200 years ago, so maybe it still does.


In the past the deals have always fallen apart before they began because (among other reasons) the combined companies would not have an acceptable CEO. Neither Scott McNealy nor Steve Jobs nor John Sculley nor Mike Spindler (not to mention Gil Amelio) seemed capable of handling a combined operation.


With today's two CEO's, Steve Jobs at Apple and Jonathan Schwartz at Sun, this continues to be true. But with Eric Schmidt in the game as a middleman it'squite possible that he could take the reins of such a combined operation and make it work

Dvorak really dredges up ancient history here, with names like John Sculley—the John Delorean of the computer business—and Gil Amelio, a guy maybe ten people remember, who briefly ran Apple during the dark days of the mid-1990s.

Which leads to the fourth and weakest piece of his evidence that Sun and Apple are headed for a merger—

Dvorak’s Exhibit 4: Apple wants to sell more servers.

Apple is looking to make a splash in the server market to solidify its position there, but it does not have the credibility of a Dell, HP, IBM or a Sun despite the quality of its offerings, and it would love to grow that very profitable side of the business. Sun is positioned to make another run at server dominance as this is written, thanks to its superstar engineer and co-founder Andreas von Bechtolsheim.

I don’t know Steve Jobs, and I don’t know Eric Schmidt, and I don’t know Andy Bechtolsheim, and I don’t know John Dvorak.

But anybody who thinks that Apple—which revolutionized the personal computer industry and then the music industry, and is now on the verge of revolutionizing the television and movie industry—is going to spend $15+ billion to “make a splash in the server market,” well, they might as well be wishing for Simon to get back together with Garfunkel.

Or, even less likely, I think, a return to the pre-mouse days, when computers played pong and were controlled by F-keys…and people wrote columns to explain how to operate the damn things.


Jeff Matthews
I Am Not Making This Up


© 2006 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.

6 comments:

morethanafeelin said...

Fantastic, love your writings. I would say John Dvorak is a dinosaur but it's not clear that dinosaurs died of their own stupidity. It is pathetic watching him compensate by dredging up names almost no one remembers as if to say "listen to me I've been around a lot longer than you."

If there's one thing I've learned it is that just about anything can happen, but Dvorak's article was about the dumbest thesis I've read in years. You nailed it.

Vinny said...

I dont know anything about the guy you are dissing in your post but his the idea of Sun and Apple coming together...well, lets just say its the magical combo required to make the world less evil (i.e. get rid of MSFT's dominance) and help progress mankind and the It industry which is sorely needed due to its fractured nature. This is already happening thanks to the likes of Google and now Sun moving away from proprietary market strategies.

Eric will never leave Google but could he perhaps help make a deal between Sun and Apple happen? You bet ya!

Eric is pals with Jonathan and Jonathan loves Jobs and Apple.
We all know Jobs is close to moving on taking his directorship roles more seriously and leaving the rains of the every day operations of Apple to someone else.
Will this kill Apple? No! Apple has a ton of talented and passionate folk.

Forget about ownership structures and who is worth more. That's what the M&A guys do best.

It's what makes sense with both companies bring their respective tech to the table and converting that into magic in the market for consumers and enterprises that matters.

You all seem to confuse these tech companies with media companies. These guys are tech passionate and are bridging media and the tech world. They are NOT media companies! I am refering to Apple and Google in this case. Sun to a smaller extent as well.

Does Apple want to enter the Server market? By them selves?
No way! Could Apple and Sun come together and bring their technologies to further drive the media industry to couple with tech. Absolutley! Servers are the driving force behind the delivery of all the media consumption. You seem to forget that!

Sun and Apple make a perfect fit! Both Unix players, Apple will be the consumer division and Sun the enterprise. Solaris will be the Mac OS Kernel and the new virtualisation tech that Sun is working on will allow Mac OS to run Linux and Windows in Apple Mac OS spaces in real time nearly natively.

Jobs is going to move away from CEO responsibilities and concentrate on being a director of Disney, Sun/Apple and Google.

Go on, short MSFT; I know you want to.

Ok, got to get away from the screen now. Go get out and enjoy some fresh Sydney.

Cheers Ya all!

I made this up said...

Just a small historical note: THe computer mouse was not invented at Xerox PARC.

The folks at PARC first saw the mouse at SRI (Stanford Research Institute) where the official U.S. Patent credit goes to the lab director Doug Englebart. You can google (mouse inventor) for more details.

SRI was just a few miles from PARC, just over the city line in Menlo Park. In the days before PARC and Apple, everyone went to SRI the see their vision of the future. Much of what we have today originated at SRI.

KAN said...

simon did reunite w/garfunkel for a reunion, cause, i think i bought the 8 track. anyways, the better analogy would be "and the beatles" are going to reunite because that's not looking good. though i hear the Stones are on tour and Dylan might open on a few dates...Cheers

Dan said...

Dvorak's reasoning is whacky, but I think there is a bit of truth to the idea. Sun is looking for a savior, and I think Appple is exploring life after Steve. Vinny hits on some of the reasons, but the biggie is that Jobs was diagnosed with (pancreatic?) cancer last year. Word is that he does not have the most serious type of cancer, but remission is not a certainty.

I think Schmidt was brought on board to help with Apple's options for life after Steve. That may include Sun.

Jeff Matthews said...

I saw the reunion--it would have been maybe 15 years at the Felt Forum in MSG.

And it was very weird. Simon did a great set with all his stuff from Graceland and Rhythm of the Saints, and got everybody on their feet.

Then Garfunkel came on like a wet blanket and did his stuff, very flat and slow and downbeat, with the whole idea being to show he could hit the high note on Bridge Over Troubled Water.

Then Garfunkel read a note from Ann Bancroft--I am not making this up--congratulating him on having written "Mrs. Robinson."

It was bizarre, spooky, and depressing.