Image source:
What's going on?
Shares of Imagination Technologies, a British tech firm that designs graphics chips for Apple, soared more than 20% on Thursday after the company said it was putting itself up for sale.
What does this mean?
Imagination got some bad news earlier this year: Apple, which is its biggest customer and accounts for about 50% of its revenue, announced that it would no longer need Imaginations design for the graphical processing units in Apple products and would start building its own chips from 2019 onwards. Following that news, Imaginations stock dropped by almost 60% in a single day!
Fast forward eighty-one days and Imagination is putting itself up for sale, essentially admitting that it will be extremely difficult to continue on its own without Apples business. However, Imagination said that its already been approached by a number of interested firms about a takeover news that investors appeared to like.
Why should I care?
For markets: Investors seem to smell a deal on the horizon.
The sharp rise in Imaginations share price on Thursday suggests that investors are optimistic that Imagination will find a suitable buyer (like another chip firm). Of course, the companys share price is still way, way below its level prior to Apples announcement, and Imagination has made clear that theres no guarantee itll find a buyer.
The bigger picture: Companies with a concentrated customer base run big risks.
Smaller suppliers with links to big companies like Apple are at risk of becoming far too dependent on individual contracts. Dialog, a semiconductor manufacturer that makes 70% of its revenue from sales to Apple, saw its shares drop by more than a third when news broke in April that Apple might start moving its battery business in-house. In any industry, a company is running a big risk when it relies on a single customer for most of its revenue.
Originally posted as part of the Finimize daily email.
The top 2 financial news stories in 3 minutes. Join over one million Finimizers
