Why Apple (Nasdaq: AAPL) Wants Japanese Chip Maker Renesas

Apple Inc. (Nasdaq: AAPL) is reportedly interested in acquiring Renesas SP Drivers, a Japanese chip maker whose products are designed to improve smartphone image display and preserve battery life.

Apple would pay approximately $482 million for a 55% stake in Renesas, a sum that would value the chip maker near $1 billion.

Renesas SP Drivers is the world’s largest producer of the microchips that are used in liquid-crystal displays. That technology is common in small to midsized consumer electronic devices like smartphones and tablets. The company has about one-third of the industry’s current market share.

The company’s chips optimize the energy use of smartphone display screens, which extends the device’s battery life. They are also known to improve the image quality on smartphones and tablets.

The Japanese semiconductor company Renesas Electronics Corp. owns the 55% stake in Renesas SP Drivers that Apple is interested in acquiring. The controlling company’s stock trades on the Tokyo Stock Exchange and reached a three-year high today following the acquisition chatter.

The Japanese company Sharp Corp. and the Taiwanese company Powerchip Technology Corp. own the remaining 45% of the company.

According to Bloomberg, Renesas Electronics Corp. is trying to unload the SP Drivers division of its company as the corporation refocuses on its core auto business. According to sources close to the company, Renesas is in acquisition discussions with multiple companies.    

Apple has not commented publicly on the acquisition rumors.

Apple’s possible acquisition of Renesas SP Drivers is clearly tied to its smartphone and tablet business, but improving display quality and battery life isn’t the only reason why Apple wants Renesas…

Why Apple (Nasdaq: AAPL) Wants Renesas

By purchasing the 55% stake in Renesas SP, Apple would control all of the company’s display-chip technologies. That would lead to improved battery life and image quality on the iPhone and iPad.

Apple works with numerous outside companies for the different parts of its devices. With the acquisition, Renesas could become the de facto “display unit” for Apple.

As Apple works toward its newest smartphone, the highly anticipated iPhone 6, many expect the device to come with a larger 5.5-inch display screen. That makes Renesas’ battery-preserving display chips critical to Apple. The last thing the Cupertino, Calif., company needs is battery life issues surrounding the launch of the iPhone 6.

“For the iPhone to maintain its premium image, it has to keep pushing its technology forward, especially in displays,” Sanford C. Bernstein Analyst Mark Newman told The Wall Street Journal.

While improving the display quality of the iPhone is critical to keeping customers happy, there’s another major benefit to this acquisition…

Apple also hopes that improvements to the phone will help improve its smartphone market share.

Last year, Apple’s share of smartphone shipments dropped to 15.2% worldwide. Its biggest competitor, Samsung, more than doubled that production.

Likewise, Apple’s iOS operating system was used on approximately 15.5% of smartphones worldwide in 2013. That compares to Google Inc.’s (Nasdaq: GOOG) Android operating system, which claimed nearly 79% of the market.

Cheaper smartphone options are flooding the market, some of which have clearer displays than the much more expensive iPhone. For instance, Chinese smartphone developer Oppo Mobile Telecommunications Corp. has developed smartphones that trump the iPhone 5s in pixels per inch and cost much less.

External challenges might not be the only driving factor in the acquisition, however.

According to a recent Reuters report, the iPhone 6 is expected to use “in-cell touch panel technology,” which would allow the phones to be thinner. However, Apple has struggled to incorporate the technology into the larger 5.5-inch screen. Because of that, Apple has yet to begin producing screens of that size. Technology from Renesas could assuage those concerns.

The acquisition of Renesas would allow Apple to curtail costs while improving the battery life and display quality of its signature iPhone and iPad mobile devices. Those factors are critical to Apple’s mobile hardware business as competition continues to mount and challenges arise.

AAPL stock has gained 26% in the last year, but has dipped 2% in the past three months. Any positive or negative developments regarding the iPhone 6 could have a short-term impact on the stock.

Do you own Apple stock? What do you think about the rumored acquisition of Renesas SP? Join the conversation on Twitter @moneymorning using #Apple.

This digital-payments stock has been making all the right moves. And it’s the best play in a trillion-dollar market…

Related Articles:

• The Wall Street Journal: Apple in Talks to Buy Chip Maker for Up to $1 Billion
• Nikkei: Apple Looking to Buy Japanese Chipmaker
• Engadget: Android Climbed to 79 Percent of Smartphone Market Share in 2013 But Its Growth Has Slowed
• Reuters: New iPhone 6 Screens to Enter Production as Early as May: Sources