Smartphone maker, HTC (News - Alert) recently announced that it has sold back half of its stake in Beats Electronics, the firm co-founded by rapper / music producer Dr. Dre and CEO, Jimmy Iovine. While HTC's stock price didn't take the news so well, with shares falling as much as four percent in trading, and concerns about HTC's overall strategy becoming more apparent, the question is just how much HTC and Beats will be operating together in the future, and what they will do together as a result.

HTC bought a substantial interest in Beats Electronics--50.1 percent--back in August for $309 million, looking to use the headphones and similar products to provide a note of differentiation in a smartphone market that was growing increasingly crowded with competitors. HTC then decided to sell back half of that half, around 24.9 percent, for $150 million, and announced that they still planned to work with Beats Electronics on several projects. HTC will also reportedly hold a 25.57 percent voting right.

The timing, and the event itself, left many investors puzzled, including Morgan Stanley, who issued a report saying that they found "HTC's announcement of cutting back its investment in Beats puzzling". Moreover, the Morgan Stanley report said that the entire deal makes little sense, from start to finish, as evidenced by lines like "Reducing its holding to 25.57 percent signals HTC's separation from Beats' operation. Possibly it implies that there was not much synergy between the two companies from the beginning."

HTC is still Beats' largest single shareholder, however, and the word is that there will still be plenty of involvement between the two companies. Several models in HTC's One line use Beats technology, for example. In a further move, HTC may have sold Beats' back some shares, but they also loaned Beats money, providing a one year loan for $224.85 million with an interest rate of LIBOR + 1.5 percent to LIBOR + 7.5 percent.

Though, one issue that few seem to be considering is the simplest of all: a matter of cash flow. Considering that, by some reports, HTC had lost a substantial amount of market share to its competitors; it stands to reason that HTC may well have needed some short-term operating funds. But then, if that were the case, why pose the loan to Beats? If they needed cash badly enough to sell off a fairly substantial asset, why turn around and loan out well more than they received from the sale? This in turn has led some, like KBC Concord Asset Management's Henry Chen, to suggest that HTC is just consolidating overall, becoming more conservative and centralized, in a bid to stave off their competitors.

Just what HTC's purpose in making the sale is as yet unclear. There are several potential explanations, but only HTC--and possibly Beats--knows the full story. Still, the whole matter will bear watching in a bid to find out just what HTC has in mind for the near-term. The market is shaping up to be a perilous place for smartphones, between Apple (News - Alert) and Samsung's current gains, and the rest of the market making its own inroads in a bid to take a bit of that market share for itself. What HTC will do in response should be worth watching.

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