71.7 F
San Diego
Sunday, Jul 21, 2024

HIGH-TECH–Analysts Like Qualcomm’s Spinoff Plan

Qualcomm Inc.’s plan to spin off its chip set business into a new public company follows a familiar strategy of creating new entities and shedding operations that don’t prove profitable.

Last week, the wireless telecommunications firm said it will form a new company consisting of its integrated circuits and systems software, operations that currently have about 2,000 employees and annual sales of more than $1 billion.

By spinning off the division, Qualcomm will put itself in a much stronger position to take advantage of more than 1,000 patents it owns for CDMA, or code division multiple access technology, said several industry analysts who cover the company.

“It’s a very smart move,” said Brian Modoff, a telecommunications analyst for Deutsche Banc Alex. Brown in San Francisco. “By separating the royalty and licensing side from the chip set side of the company, their negotiating position will become much stronger.”

The new company, temporarily named Spinco, would have much greater latitude in cross licensing technology necessary to create the type of dual mode or multimode chip sets that include both CDMA and other types of wireless technology such as GSM, or global systems for mobile communications, which is the dominant system in Europe.

In its current configuration, Qualcomm is hampered in its negotiations with manufacturers that have rights for competing wireless technology. By separating the chip set division from the licensing division, the type of licensing haggling and potential conflicts that has stymied agreements is eliminated, some analysts said.

“This is a smart move by management and a tacit admission that without the spinoff, Qualcomm would likely get a much lower net royalty rate,” said Ed Snyder, an analyst with Chase H & Q; in San Francisco, who upgraded his rating on the stock from hold to buy.

Core Group

Following the spinoff of the chip unit, slated to occur by August 2001, Qualcomn would consist of its core area of royalty and licensing of CDMA technology; the production of an E-mail system called Eudora; a transportation communications system that includes one of the firm’s original products, Omnitracks; and a digital technology unit.

The remaining company will have some 5,000 employees.

Qualcomm’s latest announcement follows a series of strategic moves that include new company spinoffs and joint ventures, and the sale of businesses deemed unprofitable.

The latter category included the sale of its infrastructure unit to Ericsson in March 1999, and the sale of its cell phone manufacturing business (a joint venture it had with Sony) to Kyocera last December. Together, those units had more than 3,500 employees.

It also spun off a unit that builds and operates wireless networks called Leap Wireless International in 1998. The firm, which has domestic and foreign operations, started with about 50 employees and now has more than 90.

Also in 1998, Qualcomm and Microsoft formed a joint venture called Wireless Knowledge.

Trimming Staff

The firm that once employed more than 11,000 workers has also been aggressive in shedding workers for competitive reasons. It laid off some 700 people in early 1999, and just last month, laid off another 200.

Local high-tech industry analyst Bruce Ahern said Qualcomm’s latest decision makes sense and was something he expected.

“They diversified in the early 1990s and now they are pulling back to concentrate on their core licensing operations, which has proved to be their cash cow,” he said.

Within the next 18 months, Ahern surmises Qualcomm will likely sell off the non-CDMA business units, including Eudora and the digital technology unit.

Qualcomm’s news was received positively by Wall Street with the stock gaining more than five points to the high $60 range in the days following the announcement. However, QCOM is still some 60 percent down from its high earlier this year of $200.

Investors have reacted negatively to recent news that a Chinese telecomm manufacturer will not be rolling out CDMA chips anytime soon, and to decreased sales of chips in South Korea.

Modoff and other analysts liked what they heard last week though.

“Each of the changes they’ve made have been a benefit to the company and its shareholders,” he said. “This is a company that knows how to create shareholder value.”

Qualcomm’s third quarter results released July 19 were in line with what most analysts had predicted. For the nine months of fiscal 2000, the company reported net income of $531.5 million on revenues of $2.6 billion.

That compares to $64.8 million in net income on revenues of $2.9 billion for the like period in the prior fiscal year.


Featured Articles


Related Articles