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Qualcomm (QCOM) Discards Split Option Post Board Review

Qualcomm Inc.QCOM has decided to maintain its corporate structure and not separate its chip making and technology licensing businesses.

This also ends the six-month strategic review by a special committee - prompted by activist investor Jana Partners - on whether the company should split its businesses. Notably, the review considered options like full or partial separation of the chip and licensing businesses, setting up a subsidiary IPO, issuing tracking stock and other changes to the company's capital structure.

However, the committee and the board of directors have collectively concluded that the company's current structure presents exceptional strategic benefits for technological leadership and product strength. The present business alignment will also help the company deliver the maximum to shareholders going ahead.

Taking these encouraging factors into consideration, the company has decided against the business split, deeming the present set-up to be the best way to make a turnaround. Notably, the company's shares have lost over 35% value year-to-date.

We note that the company has deliberated upon similar structure-related issues in the past. This July, Qualcomm had again considered restructuring its business following plummeting profits, declining share price and the purchase of $2 billion worth of stakes in the company by Jana Partners in April.

Jana had insisted on the business split among other options like cost cutting and change in executives' compensation to boost the chipmaker's share price.

Notably, Qualcomm has already taken adopted a few measures to satisfy the activist fund. In July, the company decided to lay off 15% of its 30,000-person workforce in order to reduce operating costs by $1.4 billion by the end of fiscal 2016. Further, the company has decided to cut compensations and offer three board seats to directors approved by Jana.

Rationale Behind

Notably, Qualcomm has two major units - one that sells chips, Qualcomm CDMA Technologies (QCT), and the other that licenses patents, Qualcomm Technology Licensing (QTL).

While the chip making business generates the bulk of its revenues through the sale of modems and processors to phone makers, the patent licensing arm collects royalty fees on the chip-technology developed by its chip making unit.

The company revealed that the review by its board has established that the chipset and licensing patents divisions generate funds that can be invested in research of new technology. Also, since the businesses have a symbiotic relationship, separating them would have translated into additional costs.

Further, the business separation would not have helped the company with regard to the regulatory proceedings against Qualcomm which have been on the rise of late.

Outlook Raised

Qualcomm also revealed that the company now expects to report earnings per share for the first-quarter fiscal 2016 at or moderately above the high end of its forecast range on the back of its cost cutting efforts and higher 3G/4G chip shipments than anticipated. Notably, the company had previously estimates earnings of 80-90 cents per share for the quarter.

Problems & Remedies

Regulatory concerns are on the rise for the company with the European Union (EU) Competition Commission also leveling charges against its anti-competitive practices in the chip making industry. Moreover, the Taiwan Fair Trade Commission and South Korea's Fair Trade Commission have launched an investigation assessing Qualcomm's patent-licensing practices.

In Feb 2015, Qualcomm paid a $975 million fine and also agreed to lower licensing fees in order to settle a 14-month old investigation in China, currently the largest market for the company.

Samsung's decision to use its own microprocessor for smartphones instead of Qualcomm's chipset coupled with the reluctance of some Chinese companies to sign new royalty agreements have impeded sales.

Meanwhile, the chipset maker recently signed a 3G/4G patent-licensing deal with Chinese smartphone maker - Xiaomi Inc. The deal should bring additional royalties and put speculations surrounding the chip maker's regulatory woes in China to rest.

Moreover, this deal can boost Qualcomm's top line, particularly if other Chinese smartphone manufactures start paying royalties to the company again. Notably, Qualcomm has inked agreements with four of the top five phone makers in China.

Interestingly, the company continues to gain traction in areas such as automotive, Internet of Things, mobile computing, and networking where its mobile technologies and capabilities can deliver next generation solutions. Further, Qualcomm seeks to foray into the server market with its energy efficient ARM-based chipset, posing a challenge to the likes of Intel Corp. INTC .

Our Take

Qualcomm is the largest baseband chipset developer for mobile handsets globally. The company's chipsets are used in Apple Inc.'s AAPL iPhone, Alphabet Inc. GOOGL -developed Android smartphones and Microsoft Corp.'s MSFT Windows handsets.

The company was compelled to consider a split after the company's stock lost value, sales reduced and regulatory investigations increased in number. However, notwithstanding pressure from investors and antitrust authorities, and deciding against the split has been a brave move by Qualcomm.

Though the move seems to be the right one at the moment, it is to be seen whether Qualcomm will be able to progress with its plans and address the regulatory issues building against it.

Qualcomm currently carries a Zacks Rank #4 (Sell).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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