HTC Shares Fall Most in Three Weeks After Agreeing to Buy S3 Graphics

HTC Corp. (2498), Asia’s second-largest maker of smartphones, fell the most in three weeks in Taipei trading after Citigroup Inc. cut the stock’s rating citing corporate governance concerns over the company’s planned purchase of S3 Graphics Co.

The stock fell 6.9 percent to NT$1,020 at the 1:30 p.m. close in Taipei, the stock’s biggest drop since June 15. Taipei’s benchmark Taiex index fell 0.6 percent.

Citigroup cut its recommendation on HTC shares to “sell” as analyst Kevin Chang questioned the planned takeover of S3 Graphics, part-owned by HTC Chairwoman Cher Wang. HTC, which is defending infringement lawsuits filed by rival Apple Inc. (AAPL), could have licensed patents from S3 Graphics without a purchase, Chang wrote.

Wang’s partial ownership of S3 Graphics raises “the question of conflict of interest,” Chang, who previously recommended buying HTC shares, wrote in a report today. If HTC had licensed the patents instead of making the acquisition, “concerns of corporate governance” could have been alleviated.

Chang also lowered his estimates for HTC’s sales this year and in 2012, citing a slower growth rate in global smartphone demand and increased competition.

‘Related Parties’

“This is a transaction involving related parties, but it’s certainly not the case that we could never have these types of transactions,” HTC Chief Financial Officer Winston Yung said in a phone interview today. The valuation of the S3 Graphics deal was assessed independently and the transaction is “transparent,” Yung said.

HTC will pay $300 million in cash for Fremont, California- based S3 Graphics to 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 Wang.

VIA rose 3.4 percent to close at NT$36.90.

S3 Graphics, a provider of image-compression technology used in Nintendo Co.’s Wii and Sony Corp.’s PlayStation game machines, was unprofitable last year and has a negative book value of about $9 million, Yung said yesterday. HTC will acquire 235 patents, mostly related to graphics technology.

Patent Portfolio

The main purpose of the S3 Graphics acquisition is to bolster HTC’s holdings of patents, Yung said.

S3 Graphics, which VIA acquired in 2002, won a ruling this month by a U.S. International Trade Commission judge, who determined that Apple violated two of its patents. The findings are subject to review by the six-member commission, which can block imports of products that infringe on U.S. patents.

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 also asked the U.S. International Trade Commission in March 2010 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.

To contact the reporters on this story: Weiyi Lim in Singapore at wlim26@bloomberg.net; Mark Lee in Hong Kong at wlee37@bloomberg.net

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

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