Why Apple Should Pay $100 Billion to Buy Facebook

NEW YORK ( TheStreet ) -- Apple ( AAPL) currently has a $315 billion market capitalization, with $60 billion in cash on its balance sheet. Analysts speculate it will use the money to start paying a dividend, do stock buybacks, or do an acquisition. There is one company that should be on the top of Apple's shopping list: Facebook -- and Apple should be willing to spend up to $100 billion to get it.

Facebook

Last October, Steve Jobs made an unexpected appearance during the quarterly analysts' call and was asked his intentions for the cash pile.

He responded: "We strongly believe that one or more very strategic opportunities may come along that we're in a unique position to take advantage of because of our strong cash position." In other words, they will only use this money for acquisitions.

Until now, Apple has only made small, sub-$100 million acquisitions like music streaming service Lala. A year ago, it bought mobile advertising company Quattro Wireless for $300 million. Although there were rumors six months ago that it might make a play for chip-maker ARM Holdings ( ARMH), Apple has never done a $1 billion acquisition.

But, we shouldn't mistake inaction for inevitability. What could a "very strategic" opportunity be for Apple to acquire? A chip-maker would help them increase their gross margins, but it isn't a game-changer.

In my view, the only company out there that could represent a huge increase in the opportunity set in front of Apple for the next 10 years is Facebook.

Interestingly, a week before Jobs' appearance on the analyst call last year, the LA Times reported that Jobs invited Facebook CEO Mark Zuckerberg to dinner at his house. The topic of conversation reportedly centered on Apple's new social networking service called Ping. Although the service was initially designed to allow iTunes users to share their song preferences with their Facebook friends, Jobs pulled the plug on this after Facebook tried to impose " onerous terms" on Apple.

Enabling Facebook to connect with Ping could certainly be lucrative for Apple. One media executive told me recently their traffic went up 30% immediately when they enabled this feature to their site. However, this alone isn't sufficient grounds for justifying a Facebook acquisition.

Facebook and Apple share a common enemy: Google ( GOOG). Against both, Google is able to leverage its core AdWords text advertising business to invest extraordinary resources back into iPhone/iPad and Facebook competitive products.

But Google's supremacy thanks to AdWords and search looks far less secure today than it did two years ago. In fact, if you believe Jobs, the shift from users consuming information from a PC to mobile devices like iPhone and iPad is a potentially destabilizing event for Google. Last June, Jobs said: "We discovered something -- people are going into apps. They're not just going onto to websites. And people love apps. This is an entirely new thing -- they aren't using search, they're using apps like Yelp."

And guess which app is the most popular on any mobile device? Facebook. By a long shot.

So, the question is really: how will advertisers reach users five years from now, if not through Google text or display ads? Apple will know intimate information about how we interact with our data, apps, and iTunes content. They will also know how we use our mobile devices for payments. But Facebook will likely be able to deliver an ad to the most tailored user of any company in the world.

Put the two together and you have a potential Google killer.

Facebook -- and its investors -- believe that they could do an IPO tomorrow and get a quick $70 billion valuation (making good money on their recent private valuation which put the company's value at $50 billion). So, Apple will have to pay up to start poking. The final price tag would likely need to be $100 billion to convince Facebook's owners to take the money.

But there's a price limit because, at those levels, only Apple could do this deal. Google would likely view that price tag as too rich. And why would Zuckerberg want to share power with the Google co-founders?

There are two reasons why Zuckerberg would agree to a buyout from Apple when he's already turned down Yahoo! ( YHOO), Google, and Microsoft ( MSFT). The first is to help ensure Facebook gets access to the Chinese market where it's currently blocked. Zuckerberg recently visited China on his year end vacation to visit Baidu ( BIDU) and Sina ( SINA). He's studying Mandarin an hour each day. He's unlikely to break into the market on his own, but help from Apple -- which is even more of a cult there than in the U.S. -- could help it happen.

The second reason is the enlarged potential opportunity set.

You know what's cooler than a million dollars? A trillion dollars.

A combined Apple and Facebook would unite the best products for the next decade with the most popular software platform for sharing information which brings advertisers to exactly the consumers they want to reach.

Tim Cook isn't going anywhere as Apple's leader in the short-term, but Zuckerberg would be setting himself up to be the CEO of what will likely be the world's first trillion dollar company. That will get your attention.

Eric Jackson held a long position in AAPL, SINA and YHOO at the time of publication.

Eric Jackson is founder and Managing Member of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd. In January 2007, Jackson started the world's first Internet-based campaign to increase shareholder value at Yahoo!, leading to a change in CEOs in 2007. He also spoke out in favor of Yahoo!'s accepting Microsoft's buyout offer in 2008. Global Proxy Watch named Jackson as one of its 10 "Stars" who positively influenced international corporate governance and shareowner value in 2007.

Prior to founding Ironfire Capital, Jackson was President and CEO of Jackson Leadership Systems, Inc., a leadership, strategy, and governance consulting firm. He completed his Ph.D. in the Management Department at the Columbia University Graduate School of Business in New York, with a specialization in Strategic Management and Corporate Governance, and holds a B.A. from McGill University.

He was previously Vice President of Strategy and Business Development at VoiceGenie Technologies, a software firm now owned by Alcatel-Lucent. In 2004, Jackson founded the Young Patrons' Circle at the Royal Ontario Museum in Toronto, which is now the second-largest social and philanthropic group of its kind in North America, raising $500,000 annually for the museum. You can follow Jackson on Twitter at www.twitter.com/ericjackson or @ericjackson.

You can contact Eric by emailing him at eric.jackson@thestreet.com.

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