HTC buys S3, gathers patents to fight Apple

HTC has acquired graphics company S3 in a move that will secure patents designed to fend off Apple in an ongoing lawsuit.

VIA Technologies said Wednesday that it is selling its stake in S3 Graphics to HTC in a deal valued at $300 million. VIA bought S3 in 2001 to add graphics processing to its chipsets. In 2005, VIA sold a stake to WTI Investment International to bolster S3's research and development efforts.

The HTC-S3 deal is expected to close at the end of 2011.

In the big picture, HTC is acquiring S3 to battle Apple in court. Barclays Capital Kirk Yang said in a research report that S3 will give HTC some ammunition against Apple. In March, Apple moved to sue HTC. The Apple-HTC lawsuit is largely focused on derailing Google's Android, which is the leading smartphone platform. Android, however, has a few intellectual property issues. Oracle is suing Google over Android and the search giant was prevented from acquiring Nortel patents.

S3G currently licenses its texture compression technology to global IT companies including Microsoft, Sony and Nintendo. More importantly, the ITC (International Trade Commission) made a preliminary ruling on 1 July 2011 that Apple has infringed two of S3G's four patent claims on its iOS products. We think HTC's IP acquisition on S3G not only aims to enhance its own graphic technology in smartphones/tablets, but to bolster the case against Apple during the pending lawsuit between the two parties.

Given the timing, HTC is likely to close the S3 deal and then file a countersuit against Apple revolving around graphics patents.

Separately, HTC reported that its second quarter net income doubled to NT$17.5 billion ($608 million) on strong sales of devices like its Thunderbolt. Revenue for the second quarter was NT$124.4 billion ($4.3 billion).