HTC Following Dell Model Would Offer Path for Revival: Real M&A

Apr 24, 2014 1:50 am ET

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April 24 (Bloomberg) -- Following Dell Inc.’s lead of going private may be HTC Corp.’s best shot at rebuilding itself into one of the top smartphone makers.

HTC has fallen behind Apple Inc. and Samsung Electronics Co. and this month reported its 10th straight quarter of dwindling revenue. Going private would let the $4.4 billion company pursue a more aggressive marketing campaign and a push into lower-end handsets, which will help it become competitive again, according to Deutsche Bank AG.

An 87 percent stock plunge in the last three years has left HTC trading at about a 65 percent discount to the median valuation for its peers, according to data compiled by Bloomberg. Chairwoman Cher Wang could follow the lead of Dell founder Michael Dell and pursue a buyout of HTC, enabling her to operate more freely, said Yuanta Financial Holding Co. The company had about $1.8 billion in cash at the end of 2013 that could help finance a turnaround.

“Just like Dell, they won’t have to worry about quarterly results so they can structure it for the long term,” said Dennis Chan, an analyst at Yuanta in Taipei. “If I were a shareholder, I’d take a buyout if they were to offer it right now.”

HTC shares rose 0.3 percent to close at NT$159.50 in Taipei, compared with a 0.1 percent decline in the benchmark Taiex index.

Dell Model

Dell, once the largest maker of personal computers, was taken private last year in a $24.9 billion deal. Chief Executive Officer Michael Dell teamed up with private-equity firm Silver Lake Management LLC to get the company out of the spotlight of public markets as it attempts a turnaround plan.

Wang could follow a similar path to reinvigorate the company she co-founded in 1997 as a contract maker of handheld devices. Later, CEO Peter Chou introduced HTC’s own brand of phones.

Like Dell, HTC has seen success before. It overtook Apple and Samsung as the top seller of smartphones in the U.S. for one quarter in 2011, helping revenue and profit reach records that year.

Results at HTC have deteriorated since then. The company posted its third straight quarterly operating loss earlier this month because revenue from smartphones wasn’t enough to cover the costs of engineers, administrative staff and product promotions.

‘No Need’

Wang, who said she owns 20 percent of the company and has ruled out being acquired, expressed confidence in HTC as a public company. She told Bloomberg News she has no plans to take it private and “no need to consider changing course at this moment.” Neither she nor her husband, the two largest individual shareholders, have increased their holdings in HTC since June 2012, according to Taiwan Stock Exchange data.

“I do believe that in the second quarter we are going to make a profit and this year we’re going to make a profit,” Wang said in an April 8 interview at the company’s Taipei headquarters. The recent losses are temporary, and HTC is “on the right track right now,” she said.

Analysts aren’t convinced. They estimate the stock will fall another 34 percent, while projecting a second consecutive annual loss this year. None of the 31 analysts surveyed by Bloomberg recommend investors buy HTC’s shares.

HTC now trades at a lower valuation than most of its peers. The price-sales ratio of 0.68 compares with a median multiple of 1.94 for communications equipment makers valued at more than $1 billion, according to data compiled by Bloomberg.

Marketing Shortfall

A buyout or sale would “certainly make a lot of sense for investors,” Roger Entner, an analyst at Dedham, Massachusetts- based Recon Analytics LLC, said in a phone interview. It may be their best hope of maximizing value, he said.

While HTC’s products are still well-regarded, they have been under-marketed, and that’s put the company at a disadvantage, Entner said.

Positive reviews for last year’s HTC One smartphone, predecessor to the well-received One M8 released in March, didn’t translate into higher sales because “we didn’t communicate that well” in advertising, Wang said in the interview.

HTC’s spending on marketing in the U.S. was $76 million last year, compared with Samsung’s $363 million and Apple’s $351 million, according to data from Kantar Media.

Increasing spending to promote its phones could lead to further net losses at HTC and more wrath from shareholders, should it remain public. While HTC released mid-priced phones in China last month and plans to introduce a broader lineup, it won’t use existing cash to boost marketing and risk posting further losses, Chief Financial Officer Chang Chialin said in an interview in March.

A private HTC would be able to use its cash without the scrutiny of public shareholders. The company also has no debt.

More Leeway

A buyout also could allow HTC to push into strategies that probably won’t have an immediate payoff, such as developing lower-end handsets, said Birdy Lu, a Taipei-based analyst at Deutsche Bank.

HTC could do “something that could be negative short term but positive long term,” Lu said. “They need to be very aggressive in low-end phones. They have low-end phones but they’re not cheap enough.”

A move into that portion of the market would mean smaller profit margins and sustained losses until the company was able to sell enough volume to turn profitable, Lu said.

HTC could also adjust its business model toward outsourcing low-end production and using its technology and experience to make high-end devices for clients such as Google Inc., said Chan of Yuanta Financial.

Buyout Challenges

A possible challenge for a buyout would be dealing with shares and stock options already issued to employees to supplement salaries, Chan and Lu said.

The options “would become very illiquid if they delist,” Chan said. A private buyer may need to raise pay or restructure compensation to address this issue, he said.

As a private company, HTC won’t necessarily have an easier time competing against bigger rivals such as Apple and Samsung that have more marketing firepower, said Charles Golvin, an independent wireless analyst in Los Angeles.

“The real challenges are resources,” Golvin said.

A management buyout could be a financial risk for Wang, given the company’s challenges, Recon’s Entner said.

Even so, the potential reward may be worth it.

“It’s either a life or death scenario for a private investor,” said Deutsche Bank’s Lu. If a buyout paves the way for “an aggressive marketing campaign that works out, they probably could triple their profit or more, but if it doesn’t work then they’d burn out their cash.”