What happens to the Apple contract if GTAT is acquired?

Posted: April 1, 2014 by mattmargolis24 in Apple Investor Information, GTAT Investor Information, Mesa Sapphire Plant
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by Matt Margolis

 

From time to time I read different comments about different companies that may want to acquire GT Advanced, ranging from Corning, Apple, GE and others.  I don’t believe GT is at risk to be acquired but what would happen to the Apple materials contract if GT was to be acquired?  According to the master development and supply agreement the contract between Apple and GT is not a joint venture or partnership and neither party has the power “to act for or in the name of or to bind the other party”.   Furthermore, Apple the contractual agreement does not allow GTAT to “assign, delegate or otherwise transfer this Agreement, any SOW, any Purchase Order” without the prior written consent of Apple.  Additionally, if any “Change of Control,” i.e. if GTAT more than 50% of GTAT’s voting power is acquired by a “person, or entity, or group of related entities,” without prior written consent of Apple, the agreement will be null and void.

 

8.        Relationship of Parties. Nothing in the Agreement creates a joint venture, partnership, franchise, employment or agency relationship or fiduciary duty of any kind. Neither party will have the power, and will not hold itself out as having the power, to act for or in the name of or to bind the other party.  Except as expressly provided, the Agreement is not for the benefit of any third parties.

 

9.        Assignment.  This Agreement is personal to GTAT, and GTAT may not assign, delegate or otherwise transfer this Agreement, any SOW, any Purchase Order, and/or any right or obligation thereunder without the prior written consent of Apple.  Unless otherwise defined in a SOW, a Change of Control, as defined below, will be considered an assignment of this Agreement.  Any purported or attempted assignment, delegation, subcontracting or other transfer, in whole or in part, without such consent will be null and void and will constitute a breach of this Agreement.  Subject to the foregoing, this Agreement will be binding upon, and inure to the benefit of, the successors, assigns, representatives, and administrators of the parties.  “Change of Control” means (i) any sale or exchange of the capital stock by the shareholders of GTAT, or any GTAT Related Entity that makes, uses or sells, or offers services in connection with, sapphire production or processing equipment or sapphire goods or material, in one transaction or a series of related transactions where more than 50% of the outstanding voting power of GTAT, or of GTAT’s interest in any such GTAT Related Entity, is acquired by a person or entity or group of related persons or entities; (ii) any reorganization, consolidation or merger of GTAT or any GTAT Related Entity where the outstanding voting securities of GTAT or such GTAT Related Entity immediately before the transaction represent or are converted into less than fifty percent 50% of the outstanding voting power of the surviving entity (or its parent corporation) immediately after the transaction; or (iii) the consummation of any transaction or series of related transactions that results in the sale of all or substantially all of the assets of GTAT or any GTAT Related Entity, other than where the entity acquiring shares or assets, or the surviving entity with respect to clause (ii) above, is GTAT or a wholly owned subsidiary of GTAT.

Conclusion

Apple has put significant value and protection in place on GTAT’s sapphire technology and know-how by negotiating “voiding” power over the existing agreement if GTAT is acquired.  The contract language does open the door for Apple to acquire GTAT for their own benefit, since they hold the power of consent, but I don’t believe this will ever come to fruition.  Apple’s business model is drastically different from Samsung, who sources 75%+ of the  components for their electronics devices themselves.  Apple has never owned the component suppliers of their iDevices, but they are increasing their involvement within their current supply chain.  A recent report also indicated that Apple was going to use robots on their battery assembly line.  Apple appears to be sending a clear message that they are trying to reduce costs and improve lead time for new product launches by driving automation.  Apple’s deal with GT Advanced went as far as buying a building for GT to grow sapphire material for Apple’s iDevices and investing almost $2.0B in capital for the facility.  The GT Advanced contract and ensuing capital investments were a significant step towards controlling and owning part of the supply chain, but I just don’t see Apple acquiring GTAT, because it is just not their way of doing business, for now.

 

Full Disclosure: I am long GTAT and have no plans to buy or sell any holdings in the next 72 hours

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