HTC to Acquire Chip Designer S3 Graphics, Securing Patents in Apple Fight

HTC Corp. (2498) agreed to purchase S3 Graphics Co. giving Asia’s second-largest smartphone maker access to patents as it defends against infringement lawsuits from Apple Inc. (AAPL)

HTC will pay $300 million cash for the Fremont, California- based provider of image-compression technology used in Nintendo Co.’s Wii and Sony Corp.’s PlayStation machines, Chief Financial Officer Winston Yung said in Taipei today. The sellers are VIA Technologies Inc. (2388), which has a 12.5 percent stake, and WTI Investment International Ltd., a holding company controlled by VIA and HTC’s Chairwoman Cher Wang.

Owning S3 Graphics may boost HTC in its legal battle against Apple, which last year sued the Taoyuan, Taiwan-based company for patent infringements. S3 Graphics last week won a ruling against the maker of iPhones and iPads regarding two patents for compression technology.

“Buying a patent portfolio will be very useful to us,” Yung said, declining to comment on specific lawsuits.

HTC climbed 3.3 percent to close at NT$1,095 in Taipei today before the company announced the acquisition and second- quarter earnings. The shares have gained 22 percent this year.

VIA, a Taipei-based designer of chips used in computers, will receive $147 million from the sale and recognize a $37 million gain, it said in a statement today. WTI will get $153 million, with the difference in values explained by the two owners holding different classes of share, HTC’s Yung said.

Apple Vs HTC

S3 Graphics was unprofitable last year and has a book value of about negative $9 million, he said today. HTC will acquire 235 patents, mostly related to graphics technology, as part of the transaction.

Apple filed a suit against HTC in a Delaware district court in June last year, adding to an earlier complaint against the company. The Cupertino, California-based company in March 2010 also asked the U.S. International Trade Commission to block imports of HTC phones, alleging infringement of patents related to the implementation of operating systems.

HTC denied the charges and fired back with its own lawsuits.

Carolyn Wu, a Beijing-based spokeswoman for Apple, didn’t answer calls to her mobile phone after business hours.

S3 Graphics, which VIA acquired in 2002, this month won a ruling by ITC Judge James Gildea who determined that Apple violated two of its patents, while another two were not infringed. The findings are subject to review by the six-member commission, which can block imports of products that infringe U.S. patents.

VIA has climbed 14 percent this year to NT$35.70 at the 1:30 p.m. close of trade in Taipei today before the announcement. The stock has dropped about 90 percent in the past ten years as competition from Intel Corp. and Advanced Micro Devices Inc. eroded sales and earnings.

The acquisition comes after HTC reported record quarterly profit, fueled by demand for handsets that run on Google Inc. (GOOG)’s Android operating system.

Net income more than doubled to NT$17.5 billion in the second quarter, the company said today. Revenue beat analyst estimates for a third straight quarter, helped by sales of the Desire HD, Sensation and Thunderbolt smartphones.

Goldman Sachs Group Inc. advised HTC on the transaction.

To contact the reporter on this story: Tim Culpan in Taipei at tculpan1@bloomberg.net

To contact the editor responsible for this story: Young-Sam Cho at ycho2@bloomberg.net

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