Earlier this year, Apple (NASDAQ:AAPL) confirmed a report that it had held talks to acquire its longtime graphics processor supplier Imagination Technologies (NASDAQOTH: IGNMF), but said that it didn't plan to actually make an offer.
It's not clear why the talks didn't seem to go anywhere, but I think that over the long term it would be beneficial for the iDevice maker to bring Imagination in-house. Here's why.
Imagination is good at what it does, but...
Despite the fact that Imagination faces real business challenges from ARM Holdings (NASDAQ:ARMH) in the graphics intellectual property licensing market, it still manages to produce best-in-class smartphone/tablet graphics processors. In fact, I would argue that in terms of raw technology, Imagination is still, at least today, ahead of ARM Holdings.
However, given Imagination's rough financial position and ARM's strong financial position (and, under SoftBank's wing, it should have even more freedom to invest for the long term without having to worry about pleasing shareholders on a quarterly basis), ARM may simply be able to invest more in graphics than Imagination can over the long run.
In that case, it might only be a matter of time before ARM's graphics processor technology is superior to Imagination's.
A mutually beneficial deal
I believe that Apple buying Imagination (or Imagination selling itself to Apple, if that's how you want to think about it) would be a mutually beneficial transaction.
Right now, Imagination is fighting an uphill battle in the mobile graphics market. It seems to have Apple locked down for now, but many, if not most, of Apple's competitors at the high-end are using chips without Imagination's graphics designs. If Apple is gaining share then this isn't a problem, but if Apple's share is flat or down then Imagination's business could suffer.
Imagination is also fighting the difficult battle to regain share in the large and relatively fast growing mid-range smartphone market.
If Imagination were to sell itself to Apple, then it wouldn't need to worry about fighting these battles; it would become part of Apple's graphics intellectual property development group and would be allowed to focus on building the best high-end mobile graphics processors possible.
Such a deal would be beneficial to Apple, too. By bringing the Imagination team in-house, it gets technology that's already excellent and gets to keep it to itself. More interestingly, though, Apple will be able to use its financial might to give Imagination a larger research and development budget to build even better graphics intellectual property.
In other words, Imagination would be better off not trying to compete in the broader graphics intellectual property market, and Apple would be able to take arguably the industry's best mobile graphics technology, make it even better, and keep it to itself.
Why hasn't a deal been made already?
Apple buying Imagination seems like an obvious move, and the fact that they've held talks seems to validate that a deal would make sense on some level. Yet such a deal hasn't happened.
I can only speculate as to why. Is Apple not willing to pay enough for the company? Imagination's current market capitalization is $727 million, so even at a 100% premium to the current price, we're talking about chump change for Apple.
Or, perhaps, Apple would be willing to make Imagination a generous offer, but Imagination management thinks it can create more value over the long term by remaining a stand-alone entity?
At any rate, I think Imagination would be better off in Apple's hands than as a stand-alone company, but only time will tell if such a deal happens.