HTC Buys S3 Graphics, Grows Patent Portfolio

Smartphone maker HTC is bulking up its graphics capabilities and patent portfolio by buying S3 Graphics from Via for $300 million.

HTC is making an aggressive move in the highly competitive smartphone world, buying S3 Graphics from chip maker Via Technologies and investment firm WTI Investment International for $300 million.

The move not only gives HTC greater graphics capabilities-S3 makes graphics chips for mobile phones, tablets, PCs and game consoles-but also more leverage in its ongoing legal dispute with Apple over alleged patent infringements.

The two companies have been trading legal shots since last year, when Apple officials in March 2010 filed a lawsuit against HTC, claiming the Taiwan-based device maker had infringed on almost two dozen Apple patents for its iPhone, relating to the smartphone's hardware, architecture and interface. HTC executives denied the claim, and in May 2010, in a filing with the International Trade Commission, accused Apple of infringing on HTC patents and asking that such popular Apple devices as the iPad, iPhone and iPod not be allowed in the United States.

The acquisition of S3 Graphics would further bolster HTC's patent portfolio, giving it more leverage and protection when dealing with Apple and the like in an increasingly litigious smartphone space. HTC will gain 235 patents and pending applications from S3, according to reports.

S3's image-compression technology is used in a number of game consoles, including Nintendo's Wii and Sony's PlayStation, and is increasingly being incorporated in other devices, including smartphones and tablets. And the company is no stranger to patent litigation. On July 1, the ITC ruled that Apple had infringed on two S3 patents involving image compressing and image data formats.

"Buying a patent portfolio will be very useful to us," HTC CFO Winston Yung said, according to Bloomberg News, though he did not comment on specific legal disputes.

Apple officials have been aggressive in pursuing legal action against smartphone competitors they say have infringed on Apple patents. The company also recently bulked up its own patent portfolio, as part of a consortium that bought bankrupt Nortel Networks' patents for $4.5 billion. Also in the consortium were Microsoft, BlackBerry maker Research In Motion, Sony, EMC and Ericsson. Google lost out on the patents, which some analysts said the company needed to protect itself from litigation in the mobile-technology market. Googe's Android mobile operating system is used by a growing number of mobile-device manufactures-including HTC-and is the key competitor to Apple's iPhone and iPad devices.

In the Nortel deal, Apple and the others reportedly bought 6,000 patents and patent applications that cover such areas as wireless, 4G technology, Web search, social networking, data networking, Internet, service providers and semiconductors.

News of the S3 deal came the same day that HTC announced record second-quarter financial numbers, including $608 million in income, more than doubling the income from the same period last year. HTC was helped in large part by demand for a number of popular smartphones, including the Desire HD, Thunderbolt and Sensation devices.

The HTC-S3 deal had the fingerprints of WenChi Chen and his wife, Cher Wang, all over it. Cher Wang is chairman of both HTC and Via, and is also a large shareholder in WTI. WenChi is CEO of Via. Via bought S3 in 2001 to improve the integration of graphics capabilities in its processors and chipsets. It sold part of the company to WTI in 2005.

Of the $300 million HTC will pay for S3, Via will get $147 million and WTI $37 million. While HTC will own S3, it reportedly will give a perpetual license of the S3 patents to Via, enabling the x86-based chip maker to continue to strengthen the graphics capabilities in its products.

HTC and Via officials expect the deal to close before the end of 2011.