Activists put pressure on QCOM to spin out QCT

[liahos1]

http://www.wsj.com/articles/activist-puts-pressure-on-qualcomm-1428898147

Qualcomm Inc. is under pressure from activist investor Jana Partners LLC to consider a breakup and other options to boost the giant chip maker’s sagging stock price.

Jana is asking Qualcomm to consider spinning off its chip unit from its patent-licensing business, which accounts for most of the company’s profit, according to a quarterly letter to Jana investors reviewed by The Wall Street Journal. Qualcomm itself proposed the idea 15 years ago but later called it off.

Jana—which has purchased a stake of more than $2 billion, making it one of Qualcomm’s largest shareholders—also is calling on the company to cut costs, accelerate stock buybacks and make changes to its executive-pay structure, financial reporting and board of directors, according to the New York hedge fund’s letter, which was slated to be sent to Jana investors Monday.

“Qualcomm welcomes input from our investors and has a track record of active engagement with stockholders,” a spokeswoman for the chip company. “The board and management team will continue to consider actions that are in the best interests of all stockholders.”

Jana executives and Qualcomm’s management have held private discussions since late last year, according to a person familiar with the conversations. In the letter, Jana described the talks as constructive.

Jana is one of the largest activist funds, with $11 billion in assets under management. It tends to work with management behind the scenes, as it did last year in gaining board seats at what is now Walgreens Boots Alliance Inc. Qualcomm, with a market capitalization of about $114 billion, is its largest target to date.

Breakups have been a popular theme in activist campaigns in lately. Last year activists pushed to split up eBay Inc., which is spinning off its PayPal unit, and EMC Corp., which so far has resisted a split. DuPont Co. has pushed back on an activist’s call for the breakup of the chemical company.

Qualcomm, based in San Diego, is the world’s largest maker of chips used in mobile phones. It also earns patent royalties for most smartphones sold since third-generation networks arrived in the past decade. About two-thirds of the company’s profit comes from such royalties.

A highflier in the tech bubble—it was the best-performing stock in the S&P 500 index in 1999—Qualcomm’s stock price is down 11% over the past year and the company’s total returns to shareholders have lagged behind the tech-heavy Nasdaq 100 index over the past five years.

But the company’s shares have outperformed those of many semiconductor peers. Qualcomm also has been more generous than most to shareholders, reporting $37 billion in dividends and share buybacks since 2003.

Still, competitive pressures are weighing on the company. Though it made the modems used in Apple Inc.’s latest iPhones, longtime customer Samsung Electronics Co. opted to use an internally developed processor for its new Galaxy S6 rather than Qualcomm’s latest Snapdragon chip.

Its rivals have aggressively cut costs to win business in the Chinese smartphone market; though the company recently settled an antitrust investigation in that country, it continues to face antitrust probes in the U.S., Europe and South Korea.

Qualcomm has taken steps recently to boost its stock price, including a $15 billion stock buyback announced last month, with $10 billion set to be repurchased in the next 12 months.

In the letter, Jana said the buyback is a positive step but the company needs to do more to capitalize on its strong position in the chip market. The fund said Qualcomm’s chip business is essentially worthless at the company’s present market value.

Qualcomm executives have defended its current corporate structure. But they also have said they regularly evaluate whether it makes sense to keep the chip and patent-licensing businesses together.

Qualcomm Chief Executive Steve Mollenkopf last month said the company continues to believe that the businesses support each other in important ways.

In China, for instance, having both businesses helped the company in talks with government officials during the antitrust investigation, which it settled by agreeing to pay $1 billion in fines and modifying its royalty rates on handsets sold in the country.

“But it’s something that we always look at,” Mr. Mollenkopf said in a March interview. “Are we organized in a way that provides the greatest amount of shareholder value?”

Qualcomm initiated the process of breaking up the company in 2000. It filed a registration statement to spin off its chip business in a tax-free distribution to shareholders, a move explained partly as a way to reduce conflicts in situations where the company sought to license patents to hardware rivals.

But Qualcomm called off the plan the next year.

Analysts at Arete Research Services LLP last month wrote that the chip-making business could have a market valuation of $74 billion, while the patent business could be valued at $87 billion. Arete also suggested an independent Qualcomm chip business could be attractive to suitors such as Intel Corp., or could itself try to buy Broadcom Corp.
The corporate splits proposed by Jana haven’t always worked out. The fund last year sold its stake in Civeo Corp., a lodging company for oil-field workers, in the wake of poor performance after Civeo’s spinoff of oil-and-gas-services company Oil States International Inc. and the sharp drop in oil prices.

A good friend of mine works at JANA - i think its a ballsy move. Strategically it makes little sense but financially it makes a ton of sense. If it goes through maybe INTEL can buy the QCT division instead of buying ALTR and run IA through all of the future variants of Snapdragon. Would obliterate ARM and TSM profitability hehe

 

[mrmt]

A good friend of mine works at JANA - i think its a ballsy move. Strategically it makes little sense but financially it makes a ton of sense. If it goes through maybe INTEL can buy the QCT division instead of buying ALTR and run IA through all of the future variants of Snapdragon

The only scenario where I see this making sense is the one where investors already wrote off the value of Qualcomm chip design business, e.g., it couldn't keep up with other IHVs like Apple or Mediatek or IDMs like Samsung or Intel, something that already happened, for example, with TI.

If they are outside this scenario, then it was an amateur move proposed by someone who doesn't know the industry.

 

[Mortius]

Qualcomm without its chip business is nothing but a 114 billion dollar patent troll with no need to cross license.

Compared to them, Apple and Microsoft would look like innocent boy scouts.

 

[NTMBK]

Jana—which has purchased a stake of more than $2 billion, making it one of Qualcomm’s largest shareholders—also is calling on the company to cut costs, accelerate stock buybacks and make changes to its executive-pay structure, financial reporting and board of directors

Classic Wall Street short termist, Barbarians At The Gate stuff. All about boosting the stock price for a short period, then cashing in before the whole thing comes crashing down due to crippling the long term potential. "Cut costs and accelerate stock buybacks" translates into slashing R&D spending and funnelling that money into the pockets of shareholders. Hopefully Qualcomm tells them to go jump in a lake.

 

[ShintaiDK]

Classic Wall Street short termist, Barbarians At The Gate stuff. All about boosting the stock price for a short period, then cashing in before the whole thing comes crashing down due to crippling the long term potential. "Cut costs and accelerate stock buybacks" translates into slashing R&D spending and funnelling that money into the pockets of shareholders. Hopefully Qualcomm tells them to go jump in a lake.

Unfortunately, finance capitalism almost always win.

 

[krumme]

Classic Wall Street short termist, Barbarians At The Gate stuff. All about boosting the stock price for a short period, then cashing in before the whole thing comes crashing down due to crippling the long term potential. "Cut costs and accelerate stock buybacks" translates into slashing R&D spending and funnelling that money into the pockets of shareholders. Hopefully Qualcomm tells them to go jump in a lake.

Agree. Publicly saying so would more likely jump the price up imo. It would show management is in control. Would make the stock a more long term interesting position.

 

[Arachnotronic]

Qualcomm without its chip business is nothing but a 114 billion dollar patent troll with no need to cross license.

Compared to them, Apple and Microsoft would look like innocent boy scouts.

I think you're using the phrase "patent troll" incorrectly here

 

[ShintaiDK]

I think you're using the phrase "patent troll" incorrectly here

Didnt they just get a billion $ fine in China for patent abuse?

And cases still going on in EU and US.

 

[positivedoppler]

Pro. Cell phone margin is shrinking. Even if Intel ends their contra program, it's still a market that's getting flooded by cheap arm processor. Might as well get some money now.

Con. There's a chance cell phone processing might play a vastly greater roll in the future vastly overtaking PC, Laptops, and tablets. It might eventually lead to things like VR and become the central hub for your home entertainment/control system. Jumping off the train right now might be suicide for the distant future.

 

[AllDayBreakfast]

It’s pretty hard to argue that QCOM is being mismanaged. The company announced a new $15B share repurchase program last month and hiked its dividend 14%. And the cost structure is relatively lean already. Plus, both of their major business are tightly aligned and address the same market. Growth has slowed because the global LTE handset market has slowed (and evolved) – no amount of strategic change is going to change that fact.

 

[liahos1]

i think this deal makes a lot of sense strategicaly and financially for intel.

1) They get the largest merchant SOC / baseband provider out there. Get their roadmap, pipeline and knowledge - replace all ARM cores with INTEL cores

2) Move all their products inhouse eventually - deprive tsm and (maybe samsung?) of wafer volumes and also get the foundry margin that qcom is currently paying tsm and (samsung?)

3) Get over 3.4bln of EBIT from QCT vs losing 4bln of EBIT last year in mobile - instant massive accretion vs questionable financial value for intel buying altera

4) from QCOM's perspective the stock has been a dog for a long time. Buybacks can only do so much. Having QCOM get rid of their less attractive business and take the proceeds from sale to intel - could be used to fund M&A for other ip portfolios, reinvest in QTL R&D and also continue buying back stock.

5) doubtful its going to happen but shareholders have been grumbling for awhile and JANA is very influential when it comes to this stuff.

 

[gdansk]

If Intel acquired any large portion of Qualcomm, there would surely be government intervention.

Strategically it makes little sense but financially it makes a ton of sense.

Also known as a great way to lose employees. No one wants to work at a company where the direction makes no sense. "What are we doing and why?" is a very fundamental morale question.

chip-making business could have a market valuation of $74 billion

That's awfully optimistic given the heavy competitive pressures from Rockchip, Allwinner, Mediatek, Broadcom, Marvell, HiSilicon, Leadcore and whoever else. Qualcomm has an advantage over most of their competitors, though: a high-profit unit that can feed money to their lower-profit business until all their competitors suffocate. A more long term problem is ARM making the barrier for entry into the ARM market too easy by designing competitive IP.

 

[liahos1]

If Intel acquired any large portion of Qualcomm, there would surely be government intervention.

Also known as a great way to lose employees. No one wants to work at a company where the direction makes no sense. "What are we doing and why?" is a very fundamental morale question.

That's awfully optimistic given the heavy competitive pressures from Rockchip, Allwinner, Mediatek, Broadcom, Marvell, HiSilicon, Leadcore and whoever else. Qualcomm has an advantage over most of their competitors, though: a high-profit unit that can feed money to their lower-profit business until all their competitors suffocate. A more long term problem is ARM making the barrier for entry into the ARM market too easy by designing competitive IP.

I'm saying it doesnt make sense for QCOM necc. But it does make sense for Intel. I'm sure there would be some lost jobs but net net valuable QCOM employees would be treated well.

 

[witeken]

There's no reason Intel should acquire Qualcomm. Just no.

 

[liahos1]

There's no reason Intel should acquire Qualcomm. Just no.

you think buying altera makes more sense or qcom? I am just comparing the two. Otherwise its going to be a multi year slog to get any real volumes in mobile.

 

[Arachnotronic]

That's awfully optimistic given the heavy competitive pressures from Rockchip, Allwinner, Mediatek, Broadcom, Marvell, HiSilicon, Leadcore and whoever else. Qualcomm has an advantage over most of their competitors, though: a high-profit unit that can feed money to their lower-profit business until all their competitors suffocate. A more long term problem is ARM making the barrier for entry into the ARM market too easy by designing competitive IP.

Agree that it's optimistic. EBT for the division was ~$3.8B last year. $74B would imply a very steep post-tax earnings multiple.

 

[ShintaiDK]

you think buying altera makes more sense or qcom? I am just comparing the two. Otherwise its going to be a multi year slog to get any real volumes in mobile.

Altera doesnt compete with Intels own divisions. It actually works together with it.

Qualcomm...doesnt in any way. The only thing worth from Qualcomm for Intel is modem technology.

 

[gdansk]

Altera would be a wise acquisition for Intel. They could slowly switch another major ARM licensee over to x86 and acquire more profitable products with which to keep their fabs busy.

Qualcomm's chip business is
1. less profitable than Altera or Intel's current offerings
2. in direct competition with Intel (especially their Infineon-derived product lines)
3. not in a position to beat their competitors.

Altera, within Intel, could stand a good chance of knocking Xilinix back down to #2. What would Intel gain from Qualcomm's chip unit? A leg into a mobile world using ARM? Dominance in the ARM market is not an end goal, there is too much competition and too little barrier to entry. Intel wants to get x86 into mobile.

 

[NTMBK]

The only thing worth from Qualcomm for Intel is modem technology.

They could teach Intel's mobile division how to actually turn a profit, for a start!

 

[witeken]

Altera is also under pressure...

http://seekingalpha.com/news/242343...ed-altera-shareholders-pushing-for-intel-deal

 

[scannall]

Intel wants to get x86 into mobile.

And OEM's would be stupid to let that happen. ARM is where the mobile market is now. With a lot of healthy competition in CPU's and GPU's. Why would any OEM undertake the expense of changing platforms, just for the 'privilege' of paying more for parts from single source proprietary vendor?

 

[witeken]

Why would any OEM undertake the expense of changing platforms, just for the 'privilege' of paying more for parts from single source proprietary vendor?

If Intel has a value proposition? For SoCs, that's usually the fastest CPU, GPU, and modem.

And don't forget that Intel would probably make sure there's no "expense" for changing platforms from Qualcomm to Intel (x86 and ARM are irrelevant).

 

[Arachnotronic]

If Intel has a value proposition? For SoCs, that's usually the fastest CPU, GPU, and modem.

And don't forget that Intel would probably make sure there's no "expense" for changing platforms from Qualcomm to Intel (x86 and ARM are irrelevant).

Intel needs to actually deliver, though!

 

[Idontcare]

Got to love it. Activist has no idea how to create a world-leader business the likes of Qualcomm in the first place, but they sure have no problem telling them how to self-destruct.

The head of Jana wouldn't be a Ruiz by any chance?

 

[witeken]

Intel needs to actually deliver, though!

Maybe if ASML starts delivering so Intel can capitalize on its process technology? Because which company in H2'16 would choose 20nm BEOL+FinFET for the high-end and 20/28nm for the low-end while they could get 10nm Post-Silicon at Intel?