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What Does the Beats Acquisition Mean for Apple?

Apple is close to buying the headphone maker Beats Electronics, reports are now saying. This isn’t exactly a surprise to those that are tech savvy, but for short term traders, what does this mean? Beats has made a big name for themselves over the last few years by manufacturing trendy high quality headphones, so it makes sense that Apple wants to take advantage of this, and there’s no reason to think that they would do so if it wouldn’t make a long term profit for them. The big question that remains, though, is: how should this action–if it happens–be treated by those who want to trade Apple’s stock over the short term?

There are two approaches to figuring this out. First, what does a buy out like this financially for Apple? To do this, you need to look at the reports and papers involved. Right now, Financial Times is saying that the purchase price will be around $3.2 billion.

This would easily be the largest acquisition that Apple has ever made, and it is a large chunk of change by any measure. The company, according to recent filings, has over $41 billion in cash on hand, and only around $16 billion in debt. So while $3.2 billion is a large amount of money, it is less than ten percent of what they have readily available and it doesn’t put their debt into a precarious situation. As long as Beats remains profitable for Apple under the new management, there’s no reason to believe that this will be a poor situation for them.
Apple Buys Beats
The second way to look at it is through consumer interpretation. This is called sentimental trading, and it attempts to predict the psychology of those people that will be buying and selling Apple’s stock. Based upon the above information, most people probably will act as if this will benefit Apple. This means that they will buy shares in anticipation that the stock price will go up, effectively attempting to jump on Apple while the price per share is at a relative low point.

In reality, the effect will probably be a little less instantaneous than this. Even though this is probably a good thing for Apple, the big investors such as banks, insurance companies, and financial services firms, know that something that costs about ten percent of their cash on hand will lower their spending power, and thus limit their growth potential. The big investors–sometimes called institutional investors–will likely wait to invest in Apple for a while before buying in because the extra cash will go down and this means that the company’s net worth will go down. If the stock price doesn’t go down, Apple will actually be overvalued, and a correction becomes more likely in the near future. So really, even though this investment is a huge boost for Apple in all likelihood, the immediate impact when it does happen will probably see Apple’s price go down slightly.

Short term traders can benefit off of both sides of this, but the easiest way is to wait for the price to drop, and then buy in. This can be done effectively with binary options since there is no long term financial commitment on your part and your money is never tied up for long.

There is a question about why Apple would do this, though, and it is a legitimate concern. Beats doesn’t offer an original product as there are many similar companies out there, although they do have a live streaming music service that Apple could use. This would help Apple to diversify from their iTunes line and attract a bigger audience. There are a lot of things that might benefit Apple here, but this will remain to be seen if the buyout does happen.

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