Back in April, graphics intellectual property vendor Imagination Technologies (NASDAQOTH: IGNMF) disclosed to investors that its largest customer -- Apple (AAPL +1.18%) -- would no longer use its graphics processor designs.
Apple's business makes up roughly half of Imagination's consolidated revenue base and the substantial majority of its PowerVR graphics intellectual property business.
Apple's iPhone 7 Plus incorporates an Imagination-designed graphics processor. Image source: Apple.
After this announcement, Imagination then announced that it plans to sell off its two non-graphics businesses -- its MIPS processor core licensing business and its Ensigma connectivity intellectual property business -- as it doubles down on its PowerVR business.
Then, on June 22, Imagination announced that "over the last few weeks it has received interest from a number of parties for a potential acquisition of the whole Group."
Due to that interest, Imagination says, the company's board of directors "has therefore decided to initiate a formal sale process for the Group and is engaged in preliminary discussions with potential bidders."
Imagination also indicated that the "sale process for the MIPS and Ensigma operations, which commenced on 4 May 2017, is progressing well and indicative proposals have been received for both businesses."
Selling out is the right thing to do
When Imagination announced that it was trying to shop around its MIPS and Ensigma businesses, that seemed a reasonable enough course of action. However, Imagination's bullishness around the future of its PowerVR graphics business as a stand-alone entity seemed optimistic.
Remember, most of Imagination's PowerVR graphics revenue comes from sales to Apple, and much of the total addressable market for mobile-oriented graphics intellectual property is closed off to Imagination.
Qualcomm (QCOM +3.23%), the largest vendor of mobile applications processors by shipment volume, builds the graphics processors incorporated in those applications processors in-house. That's a large part of the total addressable market that's sealed off.
Furthermore, Imagination faces intense competition from ARM Holdings, which also licenses graphics intellectual property to mobile applications processor manufacturers and has managed to take share from Imagination over the years in important sockets (e.g., in Samsung's (NASDAQOTH: SSNLF) own Exynos applications processor family).
Given the difficult market in which Imagination operates and the harsh reality that its longtime anchor customer is about to go away, the best way to maximize value for its stockholders looks to be through selling the company.
At this point, I have little doubt that Imagination will be sold. The only questions that remain now are the following:
- To what entity will Imagination be sold?
- How much will Imagination be able to get from a sale?
Note that Imagination's stock price sits at about half of where it was before the Apple announcement (and that's after a roughly 17% increase due to Imagination's sale announcement). I don't think Imagination will be able to make shareholders who bought just before this announcement whole again, but if all goes well, the company could get those investors closer.
