By David Benoit And Don Clark
Qualcomm Inc. is under pressure from activist investor Jana
Partners LLC to consider a breakup and other options to boost the
giant chip maker's sagging stock price.
Jana is asking Qualcomm to consider spinning off its chip unit
from its patent-licensing business, which accounts for most of the
company's profit, according to a quarterly letter to Jana investors
reviewed by The Wall Street Journal. Qualcomm itself proposed the
idea 15 years ago but later called it off.
Jana--which has purchased a stake of more than $2 billion,
making it one of Qualcomm's largest shareholders--also is calling
on the company to cut costs, accelerate stock buybacks and make
changes to its executive-pay structure, financial reporting and
board of directors, according to the New York hedge fund's letter,
which was slated to be sent to Jana investors Monday.
"Qualcomm welcomes input from our investors and has a track
record of active engagement with stockholders," a spokeswoman for
the chip company. "The board and management team will continue to
consider actions that are in the best interests of all
stockholders."
Jana executives and Qualcomm's management have held private
discussions since late last year, according to a person familiar
with the conversations. In the letter, Jana described the talks as
constructive.
Jana is one of the largest activist funds, with $11 billion in
assets under management. It tends to work with management behind
the scenes, as it did last year in gaining board seats at what is
now Walgreens Boots Alliance Inc. Qualcomm, with a market
capitalization of about $114 billion, is its largest target to
date.
Breakups have been a popular theme in activist campaigns in
lately. Last year activists pushed to split up eBay Inc., which is
spinning off its PayPal unit, and EMC Corp., which so far has
resisted a split. DuPont Co. has pushed back on an activist's call
for the breakup of the chemical company.
Qualcomm, based in San Diego, is the world's largest maker of
chips used in mobile phones. It also earns patent royalties for
most smartphones sold since third-generation networks arrived in
the past decade. About two-thirds of the company's profit comes
from such royalties.
A highflier in the tech bubble--it was the best-performing stock
in the S&P 500 index in 1999--Qualcomm's stock price is down
11% over the past year and the company's total returns to
shareholders have lagged behind the tech-heavy Nasdaq 100 index
over the past five years.
But the company's shares have outperformed those of many
semiconductor peers. Qualcomm also has been more generous than most
to shareholders, reporting $37 billion in dividends and share
buybacks since 2003.
Still, competitive pressures are weighing on the company. Though
it made the modems used in Apple Inc.'s latest iPhones, longtime
customer Samsung Electronics Co. opted to use an internally
developed processor for its new Galaxy S6 rather than Qualcomm's
latest Snapdragon chip.
Its rivals have aggressively cut costs to win business in the
Chinese smartphone market; though the company recently settled an
antitrust investigation in that country, it continues to face
antitrust probes in the U.S., Europe and South Korea.
Qualcomm has taken steps recently to boost its stock price,
including a $15 billion stock buyback announced last month, with
$10 billion set to be repurchased in the next 12 months.
In the letter, Jana said the buyback is a positive step but the
company needs to do more to capitalize on its strong position in
the chip market. The fund said Qualcomm's chip business is
essentially worthless at the company's present market value.
Qualcomm executives have defended its current corporate
structure. But they also have said they regularly evaluate whether
it makes sense to keep the chip and patent-licensing businesses
together.
Qualcomm Chief Executive Steve Mollenkopf last month said the
company continues to believe that the businesses support each other
in important ways.
In China, for instance, having both businesses helped the
company in talks with government officials during the antitrust
investigation, which it settled by agreeing to pay $1 billion in
fines and modifying its royalty rates on handsets sold in the
country.
"But it's something that we always look at," Mr. Mollenkopf said
in a March interview. "Are we organized in a way that provides the
greatest amount of shareholder value?"
Qualcomm initiated the process of breaking up the company in
2000. It filed a registration statement to spin off its chip
business in a tax-free distribution to shareholders, a move
explained partly as a way to reduce conflicts in situations where
the company sought to license patents to hardware rivals.
But Qualcomm called off the plan the next year.
Analysts at Arete Research Services LLP last month wrote that
the chip-making business could have a market valuation of $74
billion, while the patent business could be valued at $87 billion.
Arete also suggested an independent Qualcomm chip business could be
attractive to suitors such as Intel Corp., or could itself try to
buy Broadcom Corp.
The corporate splits proposed by Jana haven't always worked out.
The fund last year sold its stake in Civeo Corp., a lodging company
for oil-field workers, in the wake of poor performance after
Civeo's spinoff of oil-and-gas-services company Oil States
International Inc. and the sharp drop in oil prices.
Write to David Benoit at david.benoit@wsj.com and Don Clark at
don.clark@wsj.com
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