Apple Inc., in what would be the largest acquisition ever for the tech giant, is close to buying high-end headphone maker Beats Electronics for $3.2 billion.

The talks between Apple of Cupertino, Calif., and Beats Electronics of Culver City were first reported Thursday by the Financial Times and were independently confirmed by two sources familiar with the talks.

I cannot do the math on the offer. Nothing that I can compute adds up to $3 billion.
– James McQuivey, an analyst at Forrester Research
Word of the deal sent shock waves around Silicon Valley, where Apple’s reluctance to pursue big acquisitions is seen as a legacy of Steve Jobs’ preference for his company to build its own products. In fact, $3.2 billion would be almost eight times as much as Apple has ever paid for a company: $400 million in 1997 for NeXT Computer Systems, a deal that brought Jobs back to Apple.

Given Apple’s conservative approach to acquisitions, analysts had a hard time understanding why Apple would suddenly open its wallet for a company that didn’t immediately seem to offer it any significant strategic or technological advantages.

“I cannot do the math on the offer,” said James McQuivey, an analyst at Forrester Research. “Nothing that I can compute adds up to $3 billion.”

Apple and Beats spokespersons declined to comment.

The talks are ongoing, according to sources who spoke on condition of anonymity because they were not authorized to discuss the deal, and are not expected to become final before next week. The deal could fall apart for any number of reasons as final details are worked out, they said.

For most of its history, Beats focused on making high-end speakers and headphones that offered a higher-quality experience and were sold at a premium. Though the company remains private, it reportedly posted revenue of $1.2 billion last year. That growth attracted a $500-million investment from private equity firm Carlyle Group that valued Beats at $1 billion.

Founded in 2008 by hip-hop star Dr. Dre and Interscope Geffen A&M Chairman Jimmy Iovine, Beats in January launched Beats Music, a streaming music service, to rival the likes of Swedish company Spotify, Pandora Media Inc. and Apple’s own iTunes Radio.

Beats Music charges $10 a month for access to its song library online. The company also partnered with AT&T to offer a $15-a-month family plan. It has not disclosed its number of subscribers.

Analysts speculated that the potential of the streaming service may have been what drew Apple to Beats.

Apple revolutionized the music industry last decade with the iPod and the iTunes Store that made digital music downloads a big business. But according to Recording Industry Assn. of America statistics, digital downloads represented 40% of music industry revenue, while streaming and subscriptions services had grown to 28% of revenue. According to Nielsen SoundScan, 2014 sales of digital tracks as of May 4 are down 12% from a year earlier.

In 2009 Apple acquired LaLa, a cloud-music service, for a reported $17 million. And last year Apple launched iTunes Radio, a free, ad-supported streaming service similar to Pandora.

Still, with downloads in decline and streaming services surging, analysts said Apple may be trying to rethink its music business.

Apple “must have felt they needed to do something dramatic,” said Wedbush Securities analyst Michael Pachter.

By adding the headphones and speakers business, Apple would also be getting premium products that seem in line with its own premium brand image. Beats products are offered at many Apple stores, an endorsement of their quality by the company. But to date, Apple has largely stayed out of the business of making peripheral products for its own gadgets, in part because they tend to become commodities with low margins.

Courtesy of LA TIMES

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