Why Apple needs Tesla

The most significant takeover of a generation could be in the works, as reports emerge that the head of M&A at tech giant Apple, Adrian Perica, held preliminary discussions with Tesla boss Elon Musk about a possible merger late last year.

The meeting came just as analysts first floated the idea of an Apple-Tesla deal, with Berenberg analyst Adnaan Ahmad being so bold as to pen an open letter to Apple’s Tim Cook spruiking the option in October.

And while all speculation around these two worshipped brands deserves a degree of scepticism, there is plenty of merit to the idea as each firm prepares itself for a company-defining period.

Apple, the world’s largest company and long-time market darling, has stalled in terms of innovation in the eyes of many observers. The groundbreaking creator of the iPhone, iPod and iPad has seen its share price drift off highs as a result, with investors looking beyond record profits to focus on weakening growth prospects.

Electric carmaker Tesla, meanwhile, has largely gone from strength to strength as it moves ever closer to producing the world’s first affordable, mass-market electric vehicle. Run by effusive entrepreneur Elon Musk, its share price has quintupled over the past 12 months as the flagship Model S car received rave reviews, topped sales expectations and pushed the group to its first ever profit. But its big challenge – the affordable EV – lies ahead.

It is this backdrop against which a Tesla deal makes sense for Apple. A growing company with a pioneering individual at its helm could help drive the next phase of Apple’s growth. The tech giant, meanwhile, can offer resources to Tesla that will push it to fresh heights quicker than Musk ever imagined.

In merging the two we would also witness the creation of a firm with unrivalled influence, given the two brands already stir a level of devotion among their followers the envy of most firms around the world.

However the two major sticking points will be Elon Musk himself, and price. The entrepreneur has previously asserted his desire to keep hold of Tesla until its mass-market vehicle is complete, while the carmaker’s current share price makes it an expensive buy – even for Apple.

The Model S manufacturer is now worth $US25 billion ($27.5 billion), which means Apple would need to offer at least $30 billion to have any chance at a deal. That’s borderline prohibitive for a company that likely earned less than $100 million last year, with plenty of its potential already factored into the share price.

But Apple’s need for inspiration could force Tim Cook to look beyond the short-term cost.

The performance of Apple’s share price against Tesla’s since the carmaker hit markets in 2010 highlights just how handsomely the latter has been rewarded over the last 12 months.

Click to enlarge

Source: Yahoo! Finance (Tesla: red line; Apple: blue line)

For much of Tesla’s fledgling years as a public company, investors were far more confident backing the late Steve Jobs’ revolutionary Apple brand. But as Apple struggles to discover the next gamechanger, investors have voted with their pockets as to the next entrepreneur that is creating industry disruption: Elon Musk.

Apple could do worse than to follow suit.

Daniel Palmer is Business Spectator's North America correspondent @Danielbpalmer