Coverage: Qualcomm under fire

Activist investors are targeting Qualcomm Inc.’s chipset business, agitating for the company to spin it off. While the moves might make some of the company’s largest shareholders happy, the market wasn’t particularly enamored with the plan.

Bloomberg’s Beth Jinks and Ian King had these details about the investor up-rising:

Qualcomm Inc. should consider spinning off its chipset business as part of a strategic review of options to boost shareholder value, activist investor Barry Rosenstein said.

Separating the unit, which makes chips for mobile phones, could make it a takeover target, Rosenstein said Monday at 13D Monitor’s Active-Passive Investor Summit in New York. Rosenstein’s Jana Partners, which has invested more than $2 billion in Qualcomm, has held talks with the company’s management, he said.

In a letter to Jana’s investors, the fund called on Qualcomm to weigh other options such as speeding up share buybacks and reorganizing its board, including by “introducing new directors with an owner orientation and a focus on operational performance including cost management.”

Qualcomm fell less than 1 percent to $68.73 at the close in New York on Monday. The stock is down 7.5 percent this year, compared with a 2.6 percent gain by the benchmark Philadelphia Stock Market Semiconductor Index. The company has a market value of about $113 billion.

“We’ve been engaged in very constructive dialogue for the last couple of months,” Rosenstein said. “We had very friendly and I think worthwhile discussions with the company.”

The New York Times story by Michael J. de la Merced pointed out that investors are also asking for the company to replace some directors and cut costs:

Other steps that Mr. Rosenstein suggested include speeding up an already planned $15 billion stock buyback; cutting costs; shrinking the company’s 15-member board and replacing some of its directors; and pursuing potential mergers and acquisitions.

In response, Qualcomm issued a statement that said: “Our board of directors and management periodically review our corporate structure. 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.”

Don Clark wrote for The Wall Street Journal that Qualcomm is under pressure after new standards restricted their ability to set lucrative royalty rates:

One Saturday night in February, Qualcomm Inc. arranged for documents to be slipped under the doors of a select group of guests at the New Orleans Hyatt Regency. The spiral-bound folders, according to one recipient, contained articles aimed at swaying an influential industry group in a hard-fought debate over technology patents.

The chip maker’s last-ditch maneuver, the culmination of a lobbying campaign that included ads, op-eds and a website, failed. Directors of the Institute of Electrical and Electronics Engineers, which establishes standards governing communications products like Wi-Fi routers, voted the following day for policy changes that could weaken the ability of Qualcomm and other big holders of technology patents to set lucrative royalty rates.

Decisions by groups like the IEEE have played a key role in the fortunes of Qualcomm, whose unusual business model was thrust into the spotlight this week by the actions of an activist investor.

Qualcomm, founded in 1985, is the biggest maker of chips used in smartphones. But the San Diego-based company has also parlayed its pioneering role in cellular technology into a patent-licensing business that generates most of its profits. Qualcomm charges a royalty on nearly every smartphone made, whether or not the device uses its chips.

The Reuters story by Supriya Kurane and Svea Herbst-Bayliss said that Qualcomm was facing intense competition:

Qualcomm’s chip business is facing intense competition in a crowded smartphone-chip market.

Earlier this year, longtime customer Samsung Electronics Co opted to use an internally developed processor for its new Galaxy S6 smartphone rather than Qualcomm’s latest Snapdragon mobile chip.

Qualcomm’s chips business has also been facing regulatory scrutiny in China. The company agreed to pay a fine of $975 million in February, ending a 14-month Chinese government investigation into anti-competitive practices.

“Qualcomm has been accused of bundling, that is giving you a kickback on the chip if you pay them for royalties or vice versa, which is not considered a good way to do business in most countries,” Charter Equity Research analyst Edward Snyder said.

And it’s precisely these business practices that seem to be hurting Qualcomm. There’s obviously some value in the pieces since Jana has poured so much money into the company, but it seems there is a lot of work to be done before investors will realize any of that value. Dealing with activist investors will certainly be a distraction, taking management’s attention away from actually running the company.