Qualcomm reportedly considers breakup as investor applies pressure
Jana Partners, which holds a major stake in the chipmaker, says Qualcomm is hurting shareholders by not breaking out its licensing business.
Qualcomm reportedly plans to conduct a strategic review that will look at -- among other things -- the possibility of spinning off its patent-licensing business.
Qualcomm, which is set to provide its fiscal third-quarter earnings on Wednesday, may also announce that it is examining whether to break up the company, The Wall Street Journal reported Tuesday, citing people who claim to have knowledge of the situation. The announcement, if it happens, would likely be viewed as a step in the right direction by Qualcomm's outspoken activist investor Jana Partners.
Qualcomm declined to comment on the report.
Jana Partners, an $11 billion New York-based hedge fund, has signaled its desire to change things up at Qualcomm ever since it acquired a $2 billion stake in the chipmaker earlier this year. Jana has called on Qualcomm to cut its expenses, more actively buy back shares to increase cash flow to investors, and consider separating its processor business from its patent-licensing operation.
Qualcomm is the world's market leader in processors for a host of mobile devices, including smartphones and tablets. The company's line of smartphone and tablet processors, called Snapdragon, are found in devices from Samsung, LG, HTC and others. Qualcomm also makes chips that handle voice and data transmission over cellular networks. The company's competitors include several prominent names in the technology industry, such as Samsung and Intel.
The San Diego, California-based chipmaker has benefited greatly from the booming demand of mobile devices. Its revenue soared from nearly $15 billion in its fiscal year ended September 2011 to $26.5 billion in the fiscal year ended September 2014. Profit over that span nearly doubled from $4.3 billion to $8 billion.
However, as Jana and fellow critics have noted, while about two-thirds of the company's revenue comes from the sale of processors to device makers, the vast majority of Qualcomm's profit is generated off the licensing of its patent portfolio to mobile companies.
That reality has not gone unnoticed by Jana. The investor has said Qualcomm could deliver to shareholders more value for their investment by breaking out its patent-licensing operation. In a stinging letter to Qualcomm in April, Jana said the company's chip business " is essentially worthless" at its current market value, which Jana argues, is nearly entirely made up of Qualcomm's licensing business.
In April, Qualcomm rebuffed Jana's attempts at a shakeup, saying that its "opportunities remain strong" and its executives have already considered a change in direction, but have decided against such moves.
"Our Board of Directors and management periodically review our corporate structure," the company said at the time. "Prior reviews have concluded that the synergies provided by our business model create more value for stockholders than could be created through alternative corporate structures. We will continue to evaluate opportunities to enhance stockholder value and are committed to pursuing the right course of action for all of our stockholders."
Qualcomm has started to take steps that appeal to shareholders. In the same statement in April, Qualcomm noted that it had authorized a stock-repurchase program to the tune of $15 billion and would buy back $10 billion worth of shares within the year. Jana, which called the move a fine first step, said it's not enough.
Pressure from the European Union could also play a role in Qualcomm's review of its business. Last week, the European Union's competition watchdog, the European Commission, announced it has launched two formal investigations into the chipmaker over claims that it may be abusing its position as a market leader in mobile device processors. The first investigation will determine whether Qualcomm breached EU antitrust regulations by offering "financial incentives" to companies that would exclusively buy its own chips. A second investigation will center on the company's alleged practice of charging prices below cost on its processors to hurt competitors.
If Qualcomm decides to follow through on a possible breakup plan, it would be the latest in a string of technology companies that have made similar moves. Just last week, eBay spun-off digital-payment provider PayPal. Last year, HP announced that it would break in two by October, with one company handling its enterprise services, software and servers, and the other manufacturing PCs.
Qualcomm shares are up nearly 2 percent to $65.02 on Tuesday.