Analysis, Apple, Companies, Mobile Computing

Anatomy of a Deal: What Went Wrong Between Apple and GT Advanced Technologies

The history of sapphire screens on Apple (NASDAQ: AAPL) products is a short and eventful one, despite not a single product shipping with a screen protected by the strong material. What was once one of the most hotly anticipated features of the iPhone 6 never materialized, and pushed the sapphire supplier over the edge into bankruptcy. But, questions remain as to whether the deal between the two companies was a fundamentally fair or flawed one  —  that was set up without the proper due diligence.

When the iPhone 6 launched without a sapphire screen, Apple was silent to the reason why this occurred. After all, well placed leakers had fairly convincing pictures and videos of screen protectors for the iPhone 6 which, by their sheer strength, had to be made of something other than regular plastic or Gorilla Glass. The absence of the sapphire-based screens led many to question as to if the upcoming Apple Watch was in danger, as sapphire would be even more critical to the smartwatch than to the iPhone 6. But while Apple was silent on the issue of sapphire, only confirming its non-use when the iPhone 6 launched, the bankruptcy filing of  GT Advanced Technologies (OTC Pink:GTATQ) was the first step in finding out what exactly happened to Apple’s sapphire ambitions.


For most of 2014, GTAT was a stock market darling. In November of 2013 Apple announced that it GT Advanced Technologies would be its sapphire supplier, sending the company’s stock into the stratosphere. Apple’s orders accounted for approximately 80% of GTAT’s projected 2014 revenue (estimates peg this to be around $700 million), and Apple loaned it $439 million to upgrade and expand its facilities to meet the expected demand from the iPhone 6 and Apple smartwatch.

Then on October 7, bankruptcy.

Who’s to blame?

While GT Advanced Technologies has filed for bankruptcy, its filings with the courts don’t entirely paint a clear picture why the firm said it was going under. GT Advanced Technologies lawyers have petitioned the court to keep the contracts and other confidential documents between it and Apple sealed.

The best indicators come from reports by securities research firms. In a note to clients, Gilford Securities said that Apple may have forced GT Advanced Technologies to begin loan repayments early as it may have believed GT Advanced Technologies was not hitting performance targets. As mentioned by MarketWatch, Pacific Crest Securities published a note that said the firm’s researchers believe Apple was unimpressed with the quality of sapphire produced by GTAT and decided to source it elsewhere — but requiring Apple to still pay back the loans.

While the company’s lawyers fought to keep the most revealing documents about its relationship with Apple — including the contracts — they also asked the court to render the contracts the two companies have null and void saying that they imposed  “oppressive and burdensome terms and obligations on GT.”

“GT believes that it has many claims against Apple arising out of its business relationship with Apple.”

Then things got better

On October 23 GT Advanced Technologies published a press release announcing that it had reached a settlement agreement with Apple. The agreement holds that GT will wind down its sapphire production business in addition to liquidating its furnaces in order to pay back Apple.

“We are pleased with the settlement that we have negotiated with Apple,” Tom Gutierrez, president and chief executive officer of GTAT said in a statement.

“Apple put a lot of effort into an ambitious new sapphire manufacturing process with GT which is not ready for production,” Apple said in a statement. “We’re going to continue evaluating GT’s progress on larger sapphire boule development, as well as consider other options for the facility.”

But the agreement was still unfair

In all likelihood GT Advanced Technologies asked the court to keep its contract with Apple sealed, along with other key documents, because the agreement would be viewed by the public and stakeholders as fundamentally unfair for GTAT. The opportunity for massive windfalls of profit, but punishing clauses in the event that GTAT could not meet Apple’s expectations.

It could be that if GT Advanced Technologies’s biggest voting shareholders got word of this agreement there would be a coup of sorts, as shareholders would recognize the dangers of this contract. It appears (though the contracts are still sealed) that Apple was given too many outs in the event that this new sapphire process simply did not work.

Apple might not have deliberately bankrupted GT Advanced Technologies, but GT Advanced Technologies’s decision to sign on to this contract with Apple without negotiating a better deal set in place the path for  its  downfall.