Apple’s Beats Purchase Could Have Saved HTC

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Update: Apple announced the $3 billion deal on May 28th.

In what would have been a truly strange storyline, Apple would have effectively saved one of its chief rivals from collapse — had HTC held onto its controlling stake in Beats Electronics.

The Financial Times is reporting today that Apple is close to acquiring Beats Electronics for $3.2 billion, its largest purchase to date. HTC used to have a controlling position in Beats Electronics but since sold off its stake while watching its smartphone marketshare and stock price collapse. Had HTC held onto its stake in Beats — and assuming Apple still purchased Beats — HTC would have profited a tidy $1.29 billion. And HTC desperately needs $1.29 billion.

In 2011 HTC bought 50.1 percent of Beats Electronics for $309 million. At that time HTC was still riding on its early embrace of Android. It was one of the premiere smartphone makers in the world. And Beats was clearly transforming the headphone market. Apple’s white earbuds were no longer ubiquitous; colorful Beats headphones (and countless copycats) began to replace them.

Beats Electronics was kept a separate company despite HTC’s controlling stake. In 2012 the headphone maker’s exclusive manufacturing deal with Monster Cable ended, allowing Beats to manufacture its own hardware from then on — and pad the healthy margins on these expensive headphones even more.

Since 2011, HTC has imploded. Its stock price is down nearly 80% since its 2011 levels. Its marketshare is evaporating thanks to Samsung and Apple.

HTC offloaded Beats Electronics in two chunks. The sale of the first stake resulted in a $4.8 million net loss, the second one generated $85 million in profit.

But that 50.1 percent stake would now be worth $1.6 billion. In other words, HTC could have returned 318% on its original investment and made $1.29 billion in profit from the Apple acquisition.

But alas, HTC jumped off Dr. Dre’s Beats yacht to save its aging ship.

Of course, Beats might not have been as attractive an acquisition target for Apple if purchasing the company would have meant injecting so much sorely needed cash into HTC’s coffers. Apple could have pursued other headphone makers and music streaming services. If the FT’s report pans out, Apple is on the verge of buying its way into two lucrative and established markets, music streaming and gaudy headphones. And HTC could have once again been a contender.

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