What Apple Should Do With All That Mounting Cash

Apple's already flush, but just imagine what could happen if it decided to acquire Nintendo.

Much has been discussed about Apple's (AAPL) cash hoard and how it can best be used. This discussion often ends with the opinion that Apple should at least initiate a dividend or some other unexciting scenario. Of course I'm not Apple CEO Tim Cook, but that won't prevent me from suggesting what he should do with all that mounting cash.

I actually first thought of the scenario described below some years ago and shared it with some friends. The thought was that if anyone could pull this off and realize the full value from the acquisition, it would be Steve Jobs. The problem with this idea at the time was the company I believed they should acquire was riding a very hot product cycle and had seen its shares rise dramatically. There was also the issue of whether Apple was really committed to its TV strategy. As with every good deal, it's always about timing. And I believe the timing is finally right.

So what do mushrooms have to do with apples? If you haven't guessed already, I'm talking about Nintendo (NTDOY.PK). And in the event you haven't checked in on Nintendo in a while, here's a quick rundown.

It's currently in a product transition period. After scoring a runaway hit with the DS and Wii, the company is currently searching for and working to develop its “next big thing.” I believe this has positioned the company in a time frame where a deal could be done. Nintendo's market cap is currently around $17 billion and shrinking by the day. In a couple more trading sessions, the stock could be trading at book, which isn't too far away. But the story gets better. The company is sitting on over $11.5 billion in cash and no debt to speak of.

The first part of this acquisition is easy to understand – Apple would pick up some great intellectual property and potential protection around the world. There is also the potential benefit of having access to new technology that Nintendo is currently developing in its research and development facilities that could be integrated into future versions of the Apple TV. Based on this piece alone, I don't know that the stock is cheap enough to do the deal, but there's still more to factor.

Now here's where I thought Steve Jobs' connections and his experience with Pixar, Disney, and licensing would have culminated perfectly. Just think about the game libraries, characters, and licensing that Apple would acquire. Apple could do one of two things with this:

1. It could swallow it whole and have a real game development arm or,

2. These characters could be easily licensed to any number of media studios creating an endless supply of royalties and a kick to Apple earnings for years to come.

Who wouldn't want to license this library? Do you think Disney (DIS), Dreamworks (DWA), Marvel, Electronic Arts (EA), and others would be interested? Kids are already fascinated with Apple, and this would only give them further reach and branding opportunities.

I am reminded of what Paul McCartney once told Michael Jackson. Michael asked Paul what the best thing he could do with his money was. Paul told him he regretted not owning 100% of The Beatles catalog and that he wanted to acquire the 50% of it that was held in ATV Music Publishing at the time.

Paul said that owning the rights to great music was a good investment. Did Michael heed Paul's advice? You bet he did. He went on to outbid Paul and others by buying the ATV library, which brought with it a 50% interest in the vast majority of The Beatles library! I'm uncertain how this affected their friendship, but given Michael's spending habits, this was probably one of his best purchases ever.

While the Nintendo library doesn't get you John, Paul, George, or Ringo, it could net you Donkey Kong, Yoshi, Link, Mario, Luigi, Peach, and many more.

If you like this strategy (though the chart is ugly), you should keep an eye on Nintendo. This stock could still go quite a bit lower, but there is major support around $10 per share. And I think anywhere around book is a good place to begin building a position regardless of whether a buyout ever occurs.

So Tim, if you are reading this, give me a ring, and we can plot the takeover of Nintendo together.

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