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Analysts: AMS-Osram marriage could lead to closer relationship with Apple

From self-driving cars to healthcare, all roads from a potential AMS AG and OSRAM Licht AG merger lead through Apple Inc., industry experts say.

Austria's AMS, whose 3D sensors help power facial recognition on the iPhone, is holding takeover negotiations with Germany's Osram, having offered an all-cash bid of €4.3 billion for the struggling lighting firm. AMS claims the combined entity will be a global leader in a range of laser technologies, including sensors for driverless cars, and light-emitting diodes for medical devices and digital identification tools, or biometrics.

Its post-merger portfolio could help AMS expand its existing relationship with Apple, as the U.S. tech giant has been pushing into similar new markets, such as the internet of things, automotive technology and health, according to IDC analyst Marta Pinto. But investment analysts warn that any increased revenue dependence on Apple carries its own risks for AMS.

Risks and rewards

AMS generates 40% of its sales from Apple. Therefore, it could suffer if Apple phases its components out of its products or replaces it with a rival, according to a research note from investment bank Vontobel Holding AG. Fears of Apple making more components in-house are linked to its recent agreement to acquire Intel's smartphone chip business.

Weak iPhone sales could also impact AMS' revenue, Vontobel noted.

AMS has heralded vertical-cavity surface-emitting laser, or VCSEL, tech as integral to its success in the 3D sensor market. Apple began using VCSEL as part of the Face ID feature introduced on the iPhone X in 2017. The system scans a face using a beam of 30,000 infrared light dots, creating a "depth map" that is then used to unlock the iPhone every time its owner looks at it.

The tech is also a key part of Osram's vaunted turnaround into a photonics company that specializes in the generation and manipulation of light in various applications. Rocked by slowing automotive sales in China and Germany, the firm has cited VCSEL as a bright spot amid a string of gloomy earnings reports that forced it to lower its 2019 outlook.

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More than meets the eye

Apple's VCSEL investments have thus far been targeted at fostering — rather than replacing — its supply chain. And while weakening iPhone sales could still ultimately hurt Apple-supplier AMS, analysts say Apple's automotive, health and smart home ventures present new opportunities.

Pinto pointed to several recent Apple investments as an indicator that the U.S. tech giant's IoT output could soon expand beyond its HomePod smart speaker and its HomeKit smart home control software. In June, it was revealed that Apple in 2018 had nabbed the intellectual property of defunct security camera-maker Lighthouse — a startup that used 3D sensors to detect faces and environments.

Meanwhile, Apple's push into healthcare began in earnest in September 2018 with enhanced heart-tracking on the latest Apple Watch.

Here, too, light-emitting sensors could play a part, Pinto said. Apple is reportedly developing a version of the smartwatch that illuminates the wearer's bloodstream to identify blood sugar levels.

In line with this, AMS has said it plans to build "non-invasive glucose monitoring" tech post-merger.

Auto alignment

Catering to Apple in the automotive sector could be a longer-term play on AMS and Osram's part, according to Chris Webber, vice president of automotive at Strategy Analytics.

Apple is currently testing its self-driving cars on U.S. roads with a view to unlocking fully autonomous driving, Webber said.

Both AMS and Osram have a presence in automotive, though the latter's share is considerably larger. Osram's laser-emitting devices are used in light detection and ranging, or LiDAR, sensors by "multiple" automakers as part of their safety systems, such as advanced emergency braking and collision avoidance, Webber said. LiDAR measures the distance to an obstacle by calculating how long it takes a pulse of light to travel there and back.

The growth in this segment — along with AMS' ability to provide the driver and signal processing components that LiDARs require — is likely what drew AMS to Osram, according to Webber.

Apple could lean on laser sensors like the ones AMS and Osram can produce as it ramps up its fleet, Webber said. It could also opt for facial recognition to authenticate keyless car entry, underpinned by LED-powered systems similar to the tech Osram began producing last year, he added.

But the decision to merge ultimately rests with Osram's shareholders, who previously rejected a €4.0 billion bid from private equity firms Bain Capital LP and Carlyle Group LP. AMS says its latest offer addresses Osram's prior financing concerns, and it has since wasted little time talking up the new entity's automotive and sensor synergies.