Word on the street is that Apple (NASDAQ:AAPL) is preparing to purchase semiconductor maker ARM Holdings (NASDAQ:ARMH), the designer behind the CPU used in the custom A5 chip that runs Apple’s iPad and iPhone. ARM CEO Warren East told British newspaper The Daily Telegraph that it was in no way considering being acquired by either Apple (since the company already is a primary customer) or other rumored suitor Intel (NASDAQ:INTC). The latter, being one of ARM’s competitors, would be subject to massive regulatory resistance were it to purchase ARM.
Wall Street certainly took the rumors seriously. ARM shares were up more than 6% by midday Tuesday after 4.5 million shares had been exchanged.
Apple and ARM’s fates have been intertwined since ARM’s inception. The company actually began as a joint venture controlled by Apple, VLSI Technology (now a part of Philips (NYSE:PHG) and Acorn Computers. This also isn’t the first time it’s been rumored that Apple was considering picking up the company. Last summer, The London Evening Standard claimed Apple made an $8 billion bid for the company.
Apple does have good reason to want control of ARM, and not just for its wealth of technology patents. The sheer number of technology partners that patronize ARM is undoubtedly attractive to Apple. Most notable among those partners is Microsoft (NASDAQ:MSFT). It was at the Consumer Electronics Show in January that Microsoft first showed off ARM chip-based computers running the new Windows 8 operating system rather than Intel chips, a massive change from previous Windows PC designs.
If Apple controlled ARM, it would have multiple options for opening a new revenue stream. It could choose to make ARM’s technology proprietary, forcing competitors to imitate the design and leaving themselves open to Apple’s aggressive litigation tactics. Apple also could choose to let ARM continue to conduct business as it always has, operating as a subsidiary that gives Apple access to revenue generated by its competitors even as its own products sell at monumental rates around the world.
The acquisition wouldn’t break Apple’s bank, either. The Nasdaq exchange lists ARM’s market cap at just above $11 billion. With $76 billion in cash reserves, Apple could afford to pick up ARM at that price or more. It still would be a small price to pay for a company that would allow Apple to seriously cut into Microsoft and others’ businesses. The acquisition makes for a win-win scenario for Apple.
Whether ARM’s Warren East is serious about ARM not considering a sale to one of two major American technology companies remains to be seen. Apple doesn’t have a long history of hostile takeovers, its aggressive acquisitions having been kept to smaller purchases like website iPod.com or streaming music service Lala.
The Apple of 2011 is a different beast than the Apple of the past, though. It’s a company bent on completely controlling multiple markets, from smartphones to tablets. Would it spend billions to control one of the biggest computer chip makers in the west? Absolutely.
As of this writing, Anthony John Agnello did not own a position in any of the stocks named here. Follow him on Twitter at @ajohnagnello and become a fan of InvestorPlace on Facebook.
