Reference no: EM131552885

Read through the article about Imagination Tech and its market "implosion" thanks to the announcement that Apple is going to begin using its own Graphics Chips in upcoming phones (years from now).

Notice the share price of Imagination Tech since the issue happened. Is the company undervalued now from this crash? Why or why not? Why do you think the stock has crashed so far, even though Apple's announcement won't affect them for years? what do you think this company might be able to do to recover? How do you think the market "discounts" this firm's cash flows from a risk perspective? Do you think this has changed after the Apple announcement?

Also, from a capital budgeting perspective, I would like you to think about the "Project" that Imagination might need to implement to survive. How do you think company executives would have approached the cash outflows that were necessary to help fix this situation? Think about how future cash flows would be impacted if the company did nothing, what would happen to future cash flows if the company successfully created a new product or innovation that helps increase cash flows? Would managers find a positive NPV from their capital budgeting analysis?

Article:

Shares in Imagination Tech crashed more than 70 percent on Monday after the British company said its biggest customer, Apple, would stop using its graphics technology in iPhones, iPads and Apple Watches.

Imagination said Apple, which accounts for about half its revenue, had notified the British firm it was developing its own graphics chips and would no longer use Imagination's processing designs in 15 months to two years time. Shares in Imagination, in which Apple holds an 8 percent stake, plunged to 76 pence, their lowest level since 2009 and about a 10th of their record of 734 pence hit in 2012. "The biggest risk to Imagination's business model was realized this morning," analysts at Investec said.

"The loss of this revenue stream will have a material impact on the financials of the company." Imagination's shares were trading down 61 percent at 105 pence by 0915 GMT, giving the company a market value of 298 million pounds ($372 million), or 463 million pounds less than it was worth on Friday. The technology company has licensed its processing designs to Apple from the time of the iPod and receives a small royalty on every graphics chip used in a device.

Imagination, however, said it doubted Apple could go it alone without violating Imagination's patents, intellectual property and confidential information, and analysts said legal battles could lie ahead.

"This evidence has been requested by Imagination but Apple has declined to provide it," said the British company, which was founded in 1985 and listed in 1994.Apple did not immediately respond to a request for comment. Imagination's shares rose sharply between 2009 and 2012 as sales of smartphones boomed and Apple and Intel bought stakes. The company was valued at more than 2 billion pounds ($2.5 billion) in April 2012.

It struggled, however, to reduce its reliance on Apple, and has faced increased competition from the likes of chipmaker Qualcomm and British rival ARM, which developed its own graphics to complement its core processor blueprints. Imagination says it has 50 percent of the high-end smartphone market, but only 7 percent of mid-tier devices, where it has been trying to regain market share, including in phones made by Chinese manufacturers.

It said that Apple's notification had triggered talks on alternative commercial arrangements for the current license and royalty agreement. Analysts said there could be room for a compromise, and it could be a bargaining move by Apple to reduce royalties.

Apple paid Imagination license fees and royalties totalling 60.7 million pounds for the year to end-April 2016, half of its total revenue, and is expected to pay about 65 million pounds for this year, Imagination said. Most of its costs are incurred designing new technology years ahead of when it appears in devices, and it said there were minimal direct costs associated with the Apple revenue.