Qualcomm has a message for its shareholders: Breaking up is hard to do. And in the opinion of the company’s top management, it is less profitable than staying together.
On Tuesday, the chipmaker, which was an early leader in advanced semiconductors for smartphones, released the results of a months-long review that it undertook partly under pressure from activists.
The study evaluated whether Qualcomm should split into two separate companies, with one focused on making research advances and selling intellectual property, and the other on making chips. The conclusion: no split necessary.
Photo: Bloomberg
“The strategic benefits and synergies of our model are not replicable through alternative structures,” Qualcomm chief executive Steven Mollenkopf said in a statement. “We therefore believe the current structure is the best way to execute on our strategy.”
In particular, the company argued that its research into chip designs is aided by making chips, since the chip business enables the company to gain rapid adoption of its designs and helps it participate in establishing industry standards. The less profitable chip business, in the meantime, benefits from lower research and development costs, Qualcomm said.
The study was made after Jana Partners, an activist hedge fund that amassed a substantial position in Qualcomm stock, formally asked Qualcomm to consider the split in April, along with cost-cutting and changes in executive compensation, among other things.
In July, Qualcomm gave the investment firm much of what it sought, including compensation cuts of US$300 million annually as part of a US$1.4 billion spending reduction, and two board seats to Jana executives, with a third seat to an executive that Jana would approve. Qualcomm also announced staff layoffs of up to 15 percent.
The changes have so far done little for Qualcomm’s stock.
The company’s shares traded at about US$68.75 when Jana first asked for the changes and closed on Monday at US$46.83, a little more than 30 percent down. Much of that loss followed a fourth-quarter financial report last month, in which Qualcomm’s earnings fell from US$1.9 billion to US$1.1 billion, or from US$1.11 a share to US$0.67 a share a year earlier.
Qualcomm’s woes are both common to the semiconductor business and unique to its own story. While chips are generally in greater demand than ever, since computing has become a facet of everything from cars to toys, competition has become cutthroat, particularly in the Chinese market.
One result has been a record year for semiconductor company mergers. Through September this year, the industry experienced more than US$77 billion in mergers, about six times the average amount, market research firm IC Insights said.
Qualcomm’s own China story is worse than most. For more than a year, China accused the company of antitrust violations, which hurt sales, and in February slapped it with a US$975 million fine. Qualcomm also agreed to lower its royalty rates in China.
The company appears to have since patched things up with China just as the Chinese economy showed signs of slowing.
Some of Qualcomm’s issues are part of a larger trend of older tech companies struggling to raise their flagging stock prices. Many have faced activist pressure and have made changes to pacify the shareholders.
Last week, Yahoo announced a convoluted plan to spin out its core holdings into a new company, while keeping its more valuable interests in Chinese and Japanese Internet companies in the original Yahoo.
On Nov. 2, the former Hewlett-Packard began life as two separate companies, one focused on personal computers and printers and the other selling hardware and software for corporations. And earlier this year, eBay split from the electronic payments business PayPal; eBay had earlier been a target of the activist investor Carl Icahn.
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