When some investors flee, others spot an opportunity. Tsinghua Unigroup, a Chinese state-backed technology fund with around $30bn (£20.7bn) to its name, snapped up a 3 per cent stake in embattled Imagination Technologies (IMG) this week. Speculation that a takeover bid could follow sent the group's shares up 11 per cent.
Imagination licenses out microchip designs to companies such as Apple (US:AAPL) and Samsung (SSNLF:PNK) then collects a royalty every time they ship a device powered by its technology. Apple is its fourth-largest shareholder, with an 8 per cent stake in the business. Liberum analysts think the US technology titan, which recently held takeover talks with Imagination but declined to bid, will be loath to see a key partner fall under Chinese ownership. Indeed, Apple boss Tim Cook is reportedly travelling to Beijing this month to rebuild relationships with government officials, who have suspended the company's online book and film services and shifted away from using foreign technology. Although the emergence of multiple bidders is a possibility, says N+1 Singer analyst Oliver Knott, Apple might shy away from blocking the deal to avoid worsening the situation.
Tsinghua has shown a taste for Western technology businesses and sought to consolidate the semiconductor market in recent years. For instance, it bought HP's (US:HPQ) networking business, tried to buy Micron Technology (US: MU) and purchased Imagination customer Spreadtrum. Imagination could be alluring as it's one of only three pure-play intellectual property companies in the microchip industry. And its new chief and finance director may be open to a deal: they both sold their last businesses and are focused on generating shareholder returns.
This will be pivotal given Imagination's shares have plunged more than three-quarters from their peak in 2012, driven by a slowdown in the smartphone market and other issues that prompted multiple profit warnings and the resignation of veteran boss Sir Hossein Yassaie in February.
Change looks imminent, though, with management reviewing the business, slashing costs and flogging Pure, its ailing consumer electronics business. Its multimedia, processing and connectivity technology should also allow it to capitalise on soaring demand for internet-connected devices. And analysts think new licensing deals with MediaTek and Spreadtrum will generate large royalty flows in the coming years. Broker Liberum expects the group to swing to an operating profit of £18.6m in 2017 compared with a £9.2m loss this financial year.
