Qualcomm Is Considering a Breakup

Big news from Qualcomm (QCOM). The WSJ is reporting that the company is conducting a strategic review and is considering a breakup:

Qualcomm Inc. is expected to conduct a sweeping strategic review that will look at the possibility of a breakup, among other options, after an activist investor pushed for change at the chip maker.

Qualcomm, the world’s largest maker of chips used in mobile phones, may announce it is considering that and other options—including returning more cash to shareholders—when it reports fiscal third-quarter results Wednesday, according to people familiar with the matter. The company’s plans are in flux and there is no guarantee it will make any such announcement then, the people cautioned.

The potential moves Qualcomm is expected to flag largely track suggestions the activist, Jana Partners LLC, has made since it revealed a stake of more than $2 billion in the San Diego company in April. Jana, an $11 billion New York hedge fund, has urged Qualcomm to explore a breakup, cut costs, repurchase shares faster and bring new blood to its board.

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Any breakup of the company would likely separate Qualcomm’s chip-production business from its patent-licensing operation. The company, which has a market capitalization of $104 billion, gets about two-thirds of its roughly $26 billion in annual revenue from the chip business. But about two-thirds of its roughly $8 billion in yearly profit comes from royalties from the sale of smartphones that use technology it pioneered.

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The company has forecast its per-share earnings for the quarter at 85 cents to $1, down from $1.44 a year earlier, and revenue between $5.4 billion and $6.2 billion, down from $6.8 billion—both below Wall Street expectations at the time.

The move to explore a wide range of options will likely be viewed as another successful activist push for Jana. Just weeks ago, food company ConAgra Inc. agreed to exit its struggling private-brands business, a move the hedge fund had advocated.

Qualcomm has seriously considered splitting into two for years, according to people familiar with the matter. About 15 years ago, the company announced a split and filed securities documents for the plan before scrapping it after signing several large licensing deals that eased concerns customers were growing wary of competing against both sides of Qualcomm.

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

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Analysts at Arete Research Services LLP earlier this year said that a broken-up Qualcomm could enter the deal-making boom. The analysts estimated the chip-making business could have a market valuation of $74 billion, while the patent division could be valued at $87 billion and suggested an independent chip business could be attractive to suitors such as Intel.

This is very good news. The shares are up 3% in the pre-market. However, if I were a cynical person, I’d say this is a pre-emptive strike against poor earnings news. Stay tuned!

Posted by on July 21st, 2015 at 7:10 am


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