Google Snaps Up Pixel Building Team From HTC For $1.1B

Alphabet Inc.’s (NASDAQ:GOOGL) subsidiary Google is paying $1.1 billion to its longtime partner HTC Corporation for a team of its engineers and a non-exclusive license for HTC intellectual property (IP).

Many of the HTC employees moving to Google are engineering minds behind Google’s Pixel smartphone. Though none of the companies disclosed the size of the team, Bloomberg reported it to be around 2,000.

Rick Osterloh, senior vice president of Hardware at Google, stated in a blog post, “A team of HTC talent will join Google as part of the hardware organization.”

We observe that Alphabet has gained 19.6% year to date, outperforming the S&P 500’s rally of 11.9%.

There are plenty of angles to analyze in this deal.

Google’s Increased Appetite for Hardware

Google has been active on the hardware front with devices like Pixel phones and voice controlled speaker.

So, it appears that the new move is an attempt to ramp up phone making as well as other product development in the consumer hardware space by integrating its technological expertise with HTC’s AR/VR, IoT and AI capabilities.

This could help Google to have an edge over rivals like rivals like Microsoft (NASDAQ:MSFT) , Facebook (NASDAQ:FB) and Amazon (NASDAQ:AMZN) who are increasingly trying to boost their stake in these areas.

Alphabet Inc. Net Income (TTM)

In its annual I/O developers conference, the company announced that It will soon have a VR device of its own, built in partnership with HTC and Lenovo. If Google does make more hardware, it can of course make a bit of money from that as well.

Helping Hand to a Dying Partner

Per estimates from Counterpoint Research, HTC had nearly 9% share of the smartphone market in 2011 that plummeted to less than 1% last year. The Taiwanese firm lost a big part of its market share to Apple (NASDAQ:AAPL) , Huawei and Samsung (KS:005930) as it grappled with marketing and selling issues.

Google, however, has been providing some support to HTC by allowing it to build Nexus tablets and Pixel phones. According to some analysts estimate, Pixel smartphones contribute around 20% to HTC’s smartphone production. The companies have been partners since 2008.

The deal will certainly give HTC some financial aid but its future is clouded post the departure of key engineering talent.

Motorola (NYSE:MSI) Fear Factor Need Not Haunt Investors

The move marks Google’s second smartphone related acquisition attempt, the first one being Motorola Mobility, which flopped. Google bought it for a hefty $12.5 billion only to sell it for $3 billion to Lenovo after three years.

In another hardware push, the company bought Nest Labs in 2014 for $3 billion, which is still struggling to be profitable under Alphabet.

While investors are likely to remain wary of the deal, we believe it will not be a repetition of the Motorola disaster. This is because the deal costs much less than earlier hardware deals and comes at a time when Google has some proven smartphone technology and artificial intelligence in hand.

By acquiring a team that has been successful in building hardware for Google, the company has proven that it’s stepping forward more cautiously to avoid repetition of its past mistakes.

Wrapping Up

While the deal looks like a gamble on several fronts, it’s worth reminding investors that Alphabet has never hesitated to invest in areas that show real promise. A huge cash balance and technological prowess boost the tech giant’s remarkable risk-taking ability.

Alphabet carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks (Strong Buy) here.

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