There’s more signs that HTC Corp.’s acquisition strategy is running into trouble.
On Tuesday, the Taiwanese phone manufacturer said it was selling back half of the 50.1% stake it holds in headphone maker, Dr. Dre’s Beats Electronics LLC. HTC would retain a 25.1% stake in the company as the single largest shareholder and a 25.6% voting right. HTC will book a one-time investment loss of NT$146 million ($4.8 million) from the sale.
The deal with Beats was the centerpiece of HTC’s acquisitive streak of the last few years. The deal was supposed to boost its brand image against staunch competition from Samsung Electronics Co. Ltd. and Apple Inc., while also enhancing HTC’s sound technology as a selling point to customers. HTC launched products bundling free Beats headphones, for example.
HTC said the two companies would continue to cooperate on future products, but Nomura thinks the sudden change in the relationship suggests the relationship did not quite work out for HTC. For a start, the headphones didn’t really help sell the phones. HTC’s U.S. product executive Martin Fichter told the press in April that “an accessory like headphones doesn’t factor in when someone is buying a smartphone,” said Nomura.
Neither the headphones, nor HTC’s “outstanding” camera, have helped curtail HTC’s steep slide in market share against the competition in the last few quarters, writes Nomura.
HTC described the stake sale as a “re-alignment” that would provide Beats with “operational flexibility for global expansion.” Nomura reads into that statement and thinks there were cultural differences between the two from the start, posing difficulties for integration.
HTC declined to comment on the deal beyond what it released in its statement.
Others have read the move as an indication of chronic problems with the way HTC has expanded via investment and acquisition.
“Many of the transactions look positive on the surface, but the financial relations and the terms are not well thought out,” said KGI Securities analyst Richard Ko.
HTC’s more than $700 million shopping spree in 2010 and 2011 has had other missteps. Most notable was its outlay of 300 million for S3 Graphics Inc. last July with the idea that the company’s patent holdings would help in its legal battle with Apple. But S3 ultimately lost a suit against Apple in which it alleged the Cupertino company infringed on its patents.
Whatever the next episode is for HTC, the sell down of its Beats stake would seem to indicate it would be prudent to hold up before laying down cash for another acquisition.