After the Moto Mess, Why Would Google Buy HTC?

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Alphabet's (NASDAQ: GOOG) (NASDAQ: GOOGL) Google is reportedly interested in buying Taiwanese tech company HTC's struggling handset business, according to a recent report in the Commercial Times. Google reportedly doesn't plan to buy the entire company, which will continue developing virtual reality products like the Vive.

The report claims that the deal could be closed by the end of the year. However, I think investors should take this rumor with a grain of salt since it doesn't make much sense after Google's disastrous acquisition of Motorola's handset business.

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Google's been down this road before...

Google bought Motorola Mobility for $12.5 billion in 2012. At the time, Motorola faced the same problem as HTC today -- its brand was fading amid tough competition from other Android OEMs and Apple's (NASDAQ: AAPL) iPhone.

Google claimed that it was more interested in Motorola's patents, but those patents proved weak after they failed to block U.S. sales of iPhones. Google kept selling Motorola handsets -- losing hundreds of millions per quarter in the process -- until it finally gave up and sold the unit to Lenovo for just $2.9 billion in 2014.

After that painful lesson, Google decided to license its designs and brands (like Nexus and Pixel) to OEMs, which would handle the manufacturing. That low-risk approach worked out fairly well, giving Google flagship devices which showcase the latest versions of Android without third-party skins. Abruptly deciding to buy HTC's handset business would clearly contradict that strategy.

The logic of Google buying HTC

There might be some logic to the idea. First, HTC has a market cap of just 54 billion NTD ($1.8 billion), and it's likely eager to sell its core business after the stock's 75% decline over the past five years. Google had a free cash flow of $25.2 billion over the past 12 months, so the acquisition would be a small one.

HTC already manufactures Google's Pixel and Pixel 2 devices. Buying the handset unit would allow Google to control both the software and hardware for its flagship devices, ensuring that Pixel owners experience the newest Android features as intended. It could also complement Google's in-house chip design efforts -- which could eventually mirror Apple's A series chips, Huawei's Kirin chips, and Samsung's Exynos chips.

Buying HTC might also bolster Google's renewed Android One push, which consists of lower-end devices that meet Google's hardware specifications and run stock Android. That initiative got off to a slow start, but Google recently introduced a new Android One device with Xiaomi, the Mi A1, and plans to launch additional devices with Lenovo's Motorola division. Therefore, Google could buy HTC to launch other Android One phones.

Why buying HTC still wouldn't make any sense

Unfortunately, those ideas would only make sense if HTC's handset business were stable. Its share of the global smartphone market dropped from about 11% in 2011 to less than 1% today. It recently reported a 54% year-over-year drop in revenues in August, marking its lowest monthly revenue in nearly 13 years.

HTC's bottom line remains deep in the red, and analysts don't see it returning to profitability anytime soon. Sales of its latest high-end device, the U11, reportedly peaked in July and could be crushed by newer devices like Samsung's Note 8 and Apple's new iPhones.

As for the Pixel partnership, it's arguably one of HTC's last lifeboats. This gives Google tremendous leverage in negotiating favorable rates -- so it seems unnecessary for Google to acquire the entire business and shoulder the overhead costs.

Rumors about HTC are a dime a dozen...

Investors should remember that there have been plenty of buyout rumors about HTC before. Back in 2014, the rumors indicated that Chinese tech company TCL would buy HTC. Earlier this year, Oculus founder Palmer Luckey was reportedly interested in buying HTC's VR business amid reports that the unit was for sale. That directly contradicts the Commercial Times' claim that HTC wants to keep selling VR products.

Therefore, these recent rumors about Google could also fizzle out, leaving HTC stuck in a downward spiral. If that happens, Google investors should breathe a sigh of relief, knowing that they dodged another Motorola-like bullet.

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