A day before Apple Inc.'s (AAPL) latest iPhones land on store shelves, Alphabet Inc.'s (GOOGL) Google announced a $1.1 billion deal with HTC Corp. that will guarantee the future of its high-end Pixel smartphones.
"What they have actually done here is kind of an acquihire," IHS Markit Ltd. senior director Ian Fogg said regarding the deal, which will bring to Google HTC staffers who were working on the Pixel, as well as a nonexclusive license for intellectual property. "They have acquired talent, predominantly R&D staff from HTC, who were already working on Pixel smart phones." Google, and other Silicon Valley giants, have long relied on acquihires as a means of acquiring personnel.
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Google launches the Pixel 2 on Oct. 4, but Apple's launch of the iPhone 8, iPhone 8 Plus and iPhone X in mid-September will be a tough act to follow.
"What Google is doing here is essentially investing to secure and de-risk their Pixel smartphone strategy," Fogg said.
HTC has struggled. UBS notes that HTC's smartphone sales dropped 24% to 12.6 million units in 2016, with smartphone revenue declining 45% to $2.1 billion.
"Google wants nothing to stand in the way of the success of their smartphones," Fogg said. "If one of their partners is not stable, that is a significant risk for Google."
Google was initially reported to be in talks to buy all of HTC, or at least a chunk of it. 451 Research Vice President Brian Partridge said that the agreement will "jump start" Google's "hardware IQ" without involving a large acquisition. "This gives Google more options in terms of manufacturing process, facilities, using its own [system on a chip], etc."
HTC isn't the only source of hardware talent that Google has tapped recently. The search giant lured away Apple chip design star Manu Gulati this spring to head up Google's own system on a chip efforts.
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The latest agreement gives HTC a financial cushion as it looks to invest in growth areas such as virtual reality. "They have lowered their ongoing costs," Fogg said. "The haven't had to make redundancy payments. In fact, [it's] the opposite -- they have actually earned $1.1 billion."
Smartphone hardware can be a touchy subject for Google. The company famously bought Motorola Mobility in 2012 for $12.5 billion and then flipped the nonpatent assets of the smartphone business to Lenovo Group Ltd. for $2.9 billion in 2014.
The deal with HTC does not reflect a change in strategy, however, according to Fogg.
"They have been serious about hardware for some years," he said, pointing to the 2014 acquisitions of smart thermostat maker Nest Labs for $3.2 billion and the $555 million purchase of video monitor maker DropCam.
While the deal with HTC may not mark a change in strategy, it does reflect a change in the storyline for Google's Pixel.
When Google unveiled its high-end Pixel last year, the company described it as "the first phone made by Google inside and out" in a blog post.
Rick Osterloh, the head of Google's hardware group, told Bloomberg last year that "Google has done the design work and a lot of the engineering." The company presented HTC as a contract manufacturing partner in a role similar to the one that Foxconn Technology Group plays for Apple.
"What this demonstrates is actually what Google said last year -- that these are our own designs entirely -- isn't entirely correct," Fogg said. "Clearly, HTC was heavily involved in last year's Pixel phones, much more than Google would like to admit at the time."