HTC Stock Falls On S3 Purchase

Phone maker HTC is taking heat from investors over its decision to purchase S3 Graphics. Citigroup cut its rating on HTC citing corporate governance concerns. There's a definite connection between the two--S3 is partly owned by HTC Chairwoman Cher Wang, a fact that raises concerns over just how necessary the deal was. Normally, HTC might have been expected to simply license S3's technology, as opposed to buying the company outright.

HTC has responded to the allegations, telling Bloomberg: "This is a transaction involving related parties, but it’s certainly not the case that we could never have these types of transactions. The valuation of the S3 Graphics deal was assessed independently and the transaction is “transparent,” Yung said.

It's no secret that HTC's acquisition is an attempt to gather a stronger patent portfolio; the company has been fighting Apple on that front for more than a year. If the manufacturer's goal was simply to access S3TC technology, we agree that a standard license would've sufficed. Owning the recently upheld S3TC patents gives HTC the ability (or at least the opportunity) to try and bring Apple to the table to negotiate a cross-license deal as opposed to being caught on the hook for patent infringement.

Unless the HTC - S3 deal was artificially pumped up to be more advantageous to VIA, the fact that HTC was willing to pay $300 million for S3 could arguably be viewed as the lesser of two evils. Great ideas, solid execution, and first-rate engineers aren't worth squat if your competitors can kill you for patent infringements in the courtroom before your products hit shelves.

Furthermore, there's a genuine chance that S3TC could prove technologically useful in the mobile space. NV's already introduced the method via Tegra 2 and game developers are increasingly turning to unified development frameworks that let them target multiple platforms with a minimal amount of reengineering. The more common ground that exists between platforms, the more likely it is that we'll see solid titles that offer compelling experiences from the iPhone to the XBox.

The stock price drop may well be a sign that investors aren't sure HTC made the right call in betting on HTC as a patent desirable enough to anchor a negotiation strategy, but core tech patents are hard to come by. Core tech patents that've been recently upheld in a court of law are even harder to find. For now, the patent, rather than S3's core technology, is the feather in the metaphorical cap. S3 has worked to develop low power solutions for years, but there's multiple orders of magnitude between what constitutes low power in a desktop/laptop and what works within a mobile phone. Any S3-derived mobile graphics solutions will have to be designed from scratch, and that's almost certain to take a year or two.