Qualcomm Is Breaking Up, Already

Activist investors do not have to break up Qualcomm. China and Korea are already doing it. They ‘re breaking the company’s business model, that is. Qualcomm’s major Korean customer Samsung is using its own chips to power its smartphones. The Chinese government is imposing hefty fines and changing the rules of the game for the company. Chinese customers are refusing to pay royalties. Massive layoffs are adding salt to the wound, depriving the company of the talent it needs to compete effectively in a rapidly changing market environment. Wall Street has taken notice, sending the company’s stock south in a period when all major technology indexes were heading north. For years, Qualcomm has been a case study in business schools, and a stellar performer on Wall Street, rewarding long-term investors handsomely. For a good reason: soaring revenues and earnings. Qualcomm was in the right business at the right time—wireless technologies--riding one mobile communications trend after another. And its products became the industry standard. At this point in time, Qualcomm is the leading maker of LTE chips, and has a long list of big customers, including Samsung Electronics and Apple. Its revenues come from the manufacture and sale of chips that make their way into much of the world’s smartphones; and from royalties from licensing the company’s technology to other chipmakers. Simply put, Qualcomm has turned into a sole toll collector for almost every smartphone made around the world. And as a sole collector it has been setting the price of the tolls. That could explain the company’ hefty operating margins over the last two decades. However over the last twelve months, Qualcomm’s Wall Street performance has stumbled, losing close to 20% of its value compared to a 6.5% gain in the S&P 500. Still, the company has more than $15 billion in cash and very little debt. That’s why activist investors have been circling Qualcomm, looking for ways to unleash shareholder value, like a break up of the company. Qualcomm’ Financials as of 4/11/2015