Analysts say Sun's lowball bid is close to the mark

Who to believe? In mid-January, Apple Computer Inc. insiders were whispering that Sun Microsystems Inc. had offered $33 a share for the troubled computer maker. Sun sources insisted their offer actually was closer to the mid-$20s. Now, the talks are stalled over--you got it--price. So what is Apple really worth?

Shockingly little. Attaching value to a company in flux is always tricky. But experts say Sun's lowball price is closer to the mark than the $33 Apple is still hoping for. PaineWebber Inc. analyst Michael K. Kwatinetz pegs the current value of Apple shares at $28, just above where the stock settled on Jan. 31 on rumors that talks with Sun had finally fizzled.

NO PREMIUM. Unfortunately for investors, that's Apple's 18-month low, and just $4 above book value. The reason: Apple's stock has lost the premium it used to command for its sterling brand name, 20 million die-hard customers, and products that were uniquely easy to use. Analysts differ over what Apple's various parts are worth, but most come to a similar conclusion. ``The value of Apple's brand and customer base is declining at an accelerating pace,'' says CS First Boston's C. William Gurley.

An analysis of Apple's breakup value reflects the devaluation. Take the company's marquee Macintosh operating system, one of its five core businesses. While Apple doesn't break out sales or profits for the Mac operating system, Kwatinetz figures the company gets some $55 per copy. That's more than Microsoft Corp.'s average of $49 per copy of Windows, though a far cry from the $375 Apple got in 1992.

At $55 a copy, Apple can expect $323 million in 1996 operating-system revenue. But that's below the $400 million it takes to maintain and market the software, says Kwatinetz. That's why he values the unit at just two times sales vs. Microsoft's six times sales. Apple's crown jewel is worth only $646 million.

So goes Apple's mainstay hardware business. With a disastrous Christmas helping to lower the Mac's market share to 7.8% in 1995, from 8.3% a year ago, Kwatinetz values the $11 billion unit at just 20% of 1996 revenues--a multiple somewhere between that of struggling AST Research Inc. and of steady Dell Computer Corp. That puts a $2.2 billion value on the Mac business--the industry's No. 3 player.

The same dismal picture applies to Apple's $1 billion printer business. The products are state of the art, but they work only with Macs, and printers are a low-margin business. PaineWebber figures the unit's value is some 20% of revenues--just $200 million. Apple's other hardware businesses--Newton, its handheld communicator, and Pippin, a multimedia game player that will debut this March in Japan--add perhaps $150 million more.

The picture brightens slightly at Apple's applications-software subsidiary, Claris Corp. Sales there should grow a healthy 50% in 1996, to $250 million. But since almost all of its sales are for the Mac, Claris doesn't command a premium. Value: $250 million.

Add it up, and this $12.7 billion company is worth just $3.44 billion, or $28 a share. Suddenly, Sun's rumored $33 bid sounds high. Says analyst Matthew Considine of Phoenix Investment Counsel Inc., a large Sun investor: ``For Sun to pay a premium would be pretty tough for shareholders to swallow.''

Of course, a fire sale may be even harder for Apple shareholders to stomach. ``Apple will have a fight on their hands if they try to sell for anything under $40 a share,'' says Jerome L. Dodson, president of the Parnassus Fund, which holds 340,000 Apple shares bought at an average price of $37.

One solution: Apple CEO Michael Spindler could slash costs, return Apple to profitability, then pursue a merger. The first phase of his restructuring, unveiled in January, calls for 1,300 layoffs and a streamlining of products--moves that will reduce expenses 10%. That's only half of what's needed, analysts say. Spindler is expected to order a new round of cuts by mid-February. Should he slash expenses from 19% of sales to 11%--Compaq Computer Corp.'s level--Apple could command a $40-plus stock price by 1997, says Vidim Zlotnikov, a Sanford C. Bernstein analyst.

The picture could get even better should Spindler focus on core markets, such as education and publishing, where he can raise prices without losing customers. That could drive the value of the Mac hardware unit to $4.4 billion. With aggressive licensing of the Mac operating system, the business could be worth $1.6 billion. Figure a slight uptick in the remaining units' values, and Apple's total value, says Kwatinetz, could be $7.1 billion, or $58 a share--double today's worth.

For Apple shareholders, that sounds too good to be true. It probably is.

By Peter Burrows, with Kathy Rebello and Robert D. Hof, in San Francisco


Updated June 14, 1997 by bwwebmaster
Copyright 1996, Bloomberg L.P.
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