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Dropping Imagination Technologies gives us a rare look at how ruthless Apple can be

  • Apple has pulled out of its partnership with Imagination Technologies, and some analysts say the British chipmaker may not survive.
  • Apple had tried to acquire the company, but it didn't result in a deal.
  • Apple then poached its top employees.
  • And now Imagination's stock is in a hole.
  • This is Apple at its most ruthless.
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Hossein Yassaie
Imagination Technologies founder Hossein Yassaie. Twitter/Hossein Yassaie

Analysts have warned that the UK chip designer Imagination Technologies may not be able to survive without Apple, which brings in more than half of the company's revenue.

Apple's decision to ditch Imagination is a huge blow for the company — a UK tech icon with revenue of more than £120 million ($149.4 million) in the year leading up to April 2016.

On the day of the announcement, the Hertfordshire-based company, which employs roughly 1,700 people, saw its market value drop by more than 75%.

That came after Apple poached several of its key executives.

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Imagination's partnership with the company goes back nearly 10 years. Imagination products have been part of all of Apple's mobile devices — iPhones, iPads, and iPods — since 2008.

Until a few days ago, this was one of Apple's most valued suppliers. Now there is speculation the company may go to the wall. The episode gives us a rare glimpse at how ruthless Apple can be as it seeks to maintain its technological edge. The message that other companies are likely to hear — whether Apple intends it or not — is "cooperate or die."

Less than a day after the breakup, which is already poised to get messy, analysts are speculating whether Imagination can exist without Apple.

"In the worst case, survival, let alone value, is in question," Jefferies equity analyst Ken Rumph said in a note to investors on Tuesday. Rumph added that the breakup was likely to dent Imagination's profits by £65 million a year.

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Apple, which owns a 9.5% stake in Imagination, has been using Imagination's graphics processing unit chip designs under a licensing agreement worth tens of millions of pounds to Imagination every year.

But the two are set to go their separate ways within the next two years after Imagination announced on Monday that Apple intended to start designing its own GPUs. "Apple is of a view that it will no longer use the Group's intellectual property in its new products in 15 months to two years time, and as such will not be eligible for royalty payments under the current license and royalty agreement," Imagination said in a statement.

imagination
Investing.com

Some analysts are speculating that Apple could swoop in on Imagination now that its valuation has fallen off a cliff and acquire it for half the amount that it would have paid a week ago.

"A Byzantine analysis would have Apple intent on taking over Imagination," Rumph wrote, adding that Apple might still want to get its hands on Imagination's PowerVR technology. Rumph added that Apple could be "using the warning of cessation to depress its prey's valuation (and emphasize its dependence on Apple) before pouncing."

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But acquiring Imagination after sinking the company's stock would attract criticism and a lot of bad PR for Apple, which would be especially unwelcome now that the European Union is scrutinising the company's every move in Europe.

Neil Campling, an analyst at Northern Trust, is reported to have said: "It is undoubtedly a black swan moment for Imagination."

He added: "To replace lost Apple revenues will need many design wins at other OEMs (original equipment manufacturers) but that would take time and any near term beat from the Apple supercycle over the next 12 months will be overshadowed by this looming overhang. And, if Apple believes there is essentially a workaround made possible, then other smartphone designers will be evaluating the same."

tim cook
Apple CEO Tim Cook. Stephen Lam/Getty Images

The fact that Apple has taken the decision to start designing its own GPUs should not surprise investors.

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In March of last year, Apple acknowledged it had held talks with Imagination about acquiring its business. But Apple pulled out of the acquisition and went on to hire several of Imagination's key people instead.

The biggest hire is John Metcalfe, whose LinkedIn profile says he's been working as a senior director at Apple since last July. He was Imagination Technology's chief operating officer for a decade before that and was nearly a 20-year veteran of the company. In October 2015, Apple hired Imagination's vice president of hardware engineering to be a director based in the UK.

Apple has started designing more of its own chips over the past few years, including the iPhone's A-class chip and the W1 chip found in its AirPod headphones.

"Anywhere where Apple can trim cost and squeeze suppliers, they have a track record of doing so," Geoff Blaber, an analyst at CCS Insight, said in The Financial Times. "But the GPU is so strategic long-term that there's something else at play here."

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Why Apple wants to make its own GPUs

Analyst Benedict Evans highlighted in his daily newsletter on Tuesday why Apple wanted to start creating its own GPUs.

"Apple already designs its own (industry leading) SoCs and sees controlling the chip technology as a core competitive advantage," Evans wrote. "And GPUs are becoming more and more central: Apple is pushing into 'computational photography' with the iPhone 7+ camera, GPUs are central to running machine learning locally (since it turns out this uses the same kinds of maths), and, further out, Apple is (probably) working on augmented reality glasses, which will need to do all sorts of computer vision and image processing to work well — they'll need to read the world and place objects within it.

"So, GPUs matter a lot and controlling the hardware yourself is a key advantage. Not clear why Apple didn't just buy it (and it still might). There's a broader question, though — without Apple as anchor customer, what happens to the state of mobile GPUs from Imagination for everyone else — for Android? Benchmarks of the latest high-end Android, the Samsung Galaxy S8, show it's still a year or two behind Apple — this won't help."

red iphone 7
Imagination's GPUs have been used in iPhones, iPods, and iPads. Apple

IP wars are set to take place

Imagination has said it doesn't know how Apple will make devices in the future without violating intellectual-property laws.

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"Apple has not presented any evidence to substantiate its assertion that it will no longer require Imagination's technology, without violating Imagination's patents, intellectual property, and confidential information," the company said. "This evidence has been requested by Imagination but Apple has declined to provide it.

"Further, Imagination believes that it would be extremely challenging to design a brand-new GPU architecture from basics without infringing its intellectual property rights, accordingly Imagination does not accept Apple's assertions."

Update: An earlier version of this article reported that Imagination Technologies turned down an acquisition offer from Apple. This article has been updated to reflect that the talks did not result in a deal, instead of Imagination Technologies turning down a purchase offer.

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