AAPL Apple Inc

By Ted Greenwald 

Qualcomm Inc. "stepped into" the escalating spat between the U.S. and China. It is now grappling with the fallout.

The chip maker's chances of closing a critical acquisition recently dimmed after China signaled it could block the deal. It is in danger of losing a significant customer, ZTE Corp., after the U.S. banned American companies from selling components to the Chinese handset maker. Qualcomm is laying off 4.4% of its workforce in an effort boost profits through cost-cutting. And it has to convince shareholders it can deliver stand-alone growth after government forced Broadcom Inc. to drop its takeover bid in March.

The latest challenges come on top of continuing battles with two of its biggest customers, including Apple Inc., and an attempt by the son of a Qualcomm co-founder to take the company private.

Qualcomm is "in the wrong pace at the wrong time, I believe," said Steven Ré, investment chief at Fairbanks Capital Management Inc., which holds Qualcomm stock. "They need something from China when China is in a very serious negotiation with the U.S. that has billions and billions of dollars of ramifications."

Qualcomm's most-recent round of troubles began after it took the unusual step in January of inviting the Trump administration to review a proposed $117 billion hostile takeover offer by Broadcom on national-security grounds.

President Donald Trump blocked the deal, citing concerns that Broadcom's management style could compromise Qualcomm's leadership in 5G technology. The U.S. and China are rushing to dominate the next-generation cellular technology, and one of Qualcomm's closest rivals in the race is Huawei Technologies Co. -- a Chinese company the U.S. has labeled a security risk and shut out of the nation's smartphone market.

Last week, in what is widely seen as a tit-for-tat move amid the two countries' broader tariff spat, Chinese regulators indicated they were unlikely to green light Qualcomm's proposed $44 billion acquisition of NXP Semiconductors NV. The deal, which has been approved by regulators elsewhere, is a core part of Qualcomm's future strategy. NXP would allow Qualcomm to expand beyond smartphone components into automotive, security and connected devices -- markets the company thinks will be valued at $77 billion combined by 2020.

"The White House enabled Qualcomm to remain independent," said Mike Walkley, an analyst with Canaccord Genuity Group Inc. A few weeks later, he said, the same White House has escalated a trade fight with China that may be disrupting Qualcomm's ability to get the NXP deal done.

A spokesman for China's commerce ministry said in a briefing Thursday the agency would review the deal "according to antimonopoly law in an open, fair and impartial way."

Qualcomm also stands to lose access to ZTE after the Commerce Department barred American companies from selling components and software to the Chinese firm. ZTE, which makes smartphones and networking gear, accounts for between 1.5% and 2.5% of Qualcomm's revenue, according to estimates from Bernstein Research analyst Stacy Rasgon. That would amount to as much as $560 million of Qualcomm's revenue in 2017. ZTE has also partnered with the U.S. chip maker in a series of 5G trials.

On Friday, ZTE said the ban would "cause damages to all partners of ZTE, including a large number of U.S. companies."

The Chinese market is critical to Qualcomm's business, and the chip maker has gone to great lengths to cultivate its presence there. China supplied 65% of Qualcomm's $22.29 billion in revenue last year, and it is home to several fast-growing handset manufacturers.

Chief Executive Steve Mollenkopf in November joined Chinese President Xi Jinping for the signing of a $12 billion deal to supply chips to Chinese handset makers, and Qualcomm has formed joint ventures to make chips with the Chinese Guizhou provincial government and Semiconductor Manufacturing International Corp.

Qualcomm also has to fulfill ambitious profit goals executives laid out in January, when they pledged to cut $1 billion in costs. The San Diego company has initiated 1,500 layoffs in California.

Staying independent also opened the door to former Chairman and CEO Paul Jacobs's effort to try to take private the company his father co-founded. Qualcomm's current directors received a resounding vote of no confidence from shareholders earlier this month.

Meanwhile, Qualcomm remains besieged by Apple, arguably its most important customer, which is withholding billions of dollars in payments as it battles the chip maker in court over patent-royalty fees. It is waging a similar fight with Huawei, a significant customer in China. Qualcomm, which holds patents on key cellular technology, collects a royalty on nearly every smartphone sold world-wide. It has paid fines to a number of international regulators that deemed its rates too high.

The continuing turmoil has raised questions about whether Broadcom and its chief executive Hock Tan would have cut a better path through Qualcomm's many obstacles, some analysts said.

"This was Hock Tan's point -- things are not getting better, they're getting worse," Bernstein's Mr. Rasgon said. "They're at war with their biggest customers, their market is saturated, and regulators are breathing down their necks."

Qualcomm shares ended Friday trading at $51.44, close to their price a year ago and well below Broadcom's offer to acquire the company for $79 a share. Qualcomm's stock is down more than 30% since July 2014, when the company first disclosed difficulties collecting patent royalties in China -- an early inkling of an international wave of resistance to its patent-licensing troubles that has yet to recede.

"The shareholders would have been better off with Broadcom, that's obvious," said Tom Herzig, president of the investment firm PR Herzig & Co., whose portfolio is about 2.5% Qualcomm stock. But he is willing to give the company time to execute its strategy. "If you fall down a flight of stairs you don't get right up and start running back up."

Write to Ted Greenwald at Ted.Greenwald@wsj.com

(END) Dow Jones Newswires

April 23, 2018 08:14 ET (12:14 GMT)

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