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Imagination Can't Survive Without Apple, So Now Wants to Sell Itself

By Evan Niu, CFA - Jun 22, 2017 at 9:59PM

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The graphics-chip designer is on the auction block.

Seeing as how Apple (AAPL 0.17%) comprised fully half of Imagination Technologies' (NASDAQOTH: IGNMF) revenue last fiscal year, the Mac maker's decision to ditch the British company in April easily had the potential to be fatal. Though Apple gave Imagination 15 to 24 months of advance notice, which was the time frame that Apple expected it would take to transition to its own internally developed graphics architecture, it's pretty hard to replace half of your revenue. For Imagination's part, it didn't believe it was feasible that Apple could avoid infringing on its intellectual property (IP).

Imagination commenced a dispute process with Apple in May (which remains ongoing) while also announcing that it was looking to sell off its MIPS and Ensigma operations in an effort to raise cash, focus on its core PowerVR technology (the one that Apple licenses for use in iPhones and iPads), and strengthen the balance sheet.

iPhone 7 with AirPods

Image source: Apple.

The British graphics chip designer has now formally announced that it is for sale, sending shares up 16% on the London Stock Exchange.

On the auction block

Imagination says that it has received interest from an unspecified number of potential suitors that are interested in acquiring the company. As such, it is starting the formal sale process for the entire company. By announcing a formal process, suitors are not required to publicly identify themselves and can negotiate potential offers confidentially. The company is warning investors that it's quite possible no firm offers will emerge from the process.

However, there's considerable uncertainty regarding the value of Imagination's IP at this point, as well as who might currently be interested in it. Most rivals already develop their own graphics architectures that compete with PowerVR, such as Qualcomm's Adreno or ARM's Mali, so Apple was effectively carrying Imagination's PowerVR as its dominant customer. That's not to say that Imagination should have a hard time closing a sale, since it apparently already has interest. Investors just don't know how much they're going to get for the company.

Beyond losing Apple as a customer, the Mac maker had already been actively poaching key executives and engineers from Imagination for months, so Imagination has been losing talent as well.

Apple holds a minority 9.5% stake in Imagination, and in early 2016, Apple and Imagination reportedly had negotiations about a potential full-on acquisition; Apple decided not to make an offer. It's not clear why the talks fell through, but I bet Imagination wishes it would have sold back then instead of having to do so now.

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