Qualcomm Board, Executives Reject Push to Break Up

After months of analysis, company officials say Qualcomm is stronger with its chip-making and licensing businesses under the same roof.

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Qualcomm officials said they will keep the company intact, noting that the best way to deal with its myriad challenges is by ensuring that the vendor's chip-making and licensing businesses stay together.

The decision, announced Dec. 15, comes after a months-long review by a special committee comprising members of the company's board of directors, and after activist investor Jana Partners urged Qualcomm executives to consider the move in order to increase the company's value and return more money to shareholders.

After reviewing various options, it was obvious that keeping the company together gives Qualcomm the best chance to drive growth and to extend the reach of its technologies into new growth areas, according to CEO Steve Mollenkopf.

"The strategic benefits and synergies of our model are not replicable through alternative structures," Mollenkopf said in a statement. "We therefore believe the current structure is the best way to execute on our strategy to build on our position in the ecosystem and deliver enhanced performance and returns. Looking ahead, we have a focused plan in place that we believe will drive growth and we are off to a good start implementing that plan."

The Wall Street Journal, citing an unnamed source, said Jana officials were satisfied with the company's review and decision. Qualcomm already had made concessions to shareholder demands in July, including cutting $1.4 billion in expenses—which involved slashing the workforce by 11 percent—changing executive compensation policies and restructuring the board in line with Jana desires.

Company executives over the years had periodically reviewed the chip maker's corporate structure and considered whether to separate its businesses. This was only the latest look at the issue, according to Executive Chairman Paul Jacobs.

"Over the years, as the landscape has evolved, we have periodically analyzed our business structure to test whether we are best positioned to drive stockholder value, and we have made fundamental changes to enhance value, when appropriate," Jacobs said in a statement. "Given the dynamic industry and competitive environment, we decided to take a fresh look at our structure to ensure we were doing everything possible to enhance the value of the company and position ourselves for long-term success."

Charles King, principal analyst with Pund-IT, said Qualcomm made the right decision.

"This company is probably better off not doing it at this point," King told eWEEK. "It's better to have a single, slightly flawed, unified entity rather than two separate entities where one is significantly weaker than the other one."

Qualcomm, the world's larger mobile chip maker, is making a push into such areas at the Internet of things (IoT) and the data center, and such initiatives are better made as a stronger single company, he said.

There is some momentum in the industry behind the idea that vendors can increase their value by breaking in two, with Hewlett-Packard being the poster child for the move. On Nov. 1, the company became two entities, with Hewlett Packard Enterprise (HPE) focusing on enterprise IT products and HP Inc. selling PCs and printers.

But King said such moves may return more money to shareholders, yet he's unconvinced they help companies in the long run compete and innovate better.

For Qualcomm, the two businesses are tightly intertwined. The chip-making business drives revenues at the company, while the licensing unit generates the most profits, which support R&D that results in more products that can be licensed.

The company is wrapping up what has been a difficult year that has seen its stock price take a significant hit. The company has faced regulatory investigations in several regions, including Europe, Taiwan, China, South Korea and the U.S. It also hurt when Samsung opted to use its own processor rather than Qualcomm's Snapdragon 810 in its new Galaxy S6 smartphone. Qualcomm also has been squeezed in the high end of the smartphone space by Apple and Samsung, while having difficulty getting some Chinese device makers to pay full patent royalties on the products they were selling.

However, Samsung reportedly will use Qualcomm's new Snapdragon 820 system-on-a-chip (SoC) in some of its upcoming Galaxy S7 device.

Despite the challenges, company officials are seeing some promise. At the same time the officials announced their decision on the corporate structure, they also said that in the current financial quarter, Qualcomm is seeing shipments and prices for 3G and 4G wireless products stronger than expected, which will lead to earnings that will be at or beyond the high end of its previous guidance.