Activist investor hedge fund JANA Partners took a $2 billion stake in chip maker Qualcomm earlier this spring. Shortly thereafter, JANA began to pressure Qualcomm management to improve shareholder returns. The activist firm also made a number of specific suggestions, including examining the possibility of breaking up the company.
Qualcomm management had been resisting the activist’s suggestions to date, but according to knowledgeable company sources who spoke to the Wall Street Journal on Monday, the mobile chip manufacturer will likely conduct a sweeping strategic review that will consider a break up of the country as well as other options.
According to the WSJ sources, Qualcomm is planning to announce it is will undertake a strategic review analyzing all options, including giving shareholders more cash during its fiscal third-quarter earnings results on Wednesday. However, the decision has not been finalized by the BoD, and it’s possible the firm will not announce a strategic review this week.
The San Diego-based semiconductor firm has made efforts to support its stock price, which has slipped 14% so far this year. The steps taken include a $15 billion stock buyback unveiled this spring, with $10 billion earmarked for buybacks over the next year. JANA had hailed this move as a “good first step.”
More on Qualcomm strategic review
The changes Qualcomm is undertaking largely mirror the suggestions of JANA. The New York hedge fund has been pushing Qualcomm to explore a breakup, reduce costs, repurchase more shares and bring in new members to the BoD.
The sources noted it’s also possible that Qualcomm will reshuffle its board and give Jana a say in adding one or two new independent directors.
A Qualcomm spokesperson would not comment, and referred to the firm’s statement this spring that it examines its corporate structure regularly, but that earlier reviews have determined shareholders are best served with the current corporate structure.
Qualcomm – Details on break up plans
A split up of the firm would carve off Qualcomm’s chip-production business from its patent-licensing unit. The semiconductor firm has a market cap of $104 billion, and earns around two-thirds of its $26 billion annual revenues from its chip-making business. That said, about two-thirds of the company’s close to $8 billion in annual profits comes from royalties from the sale of smartphones that use its technology.
If the spinoff occurs, Qualcomm will become the latest tech titan to reshape itself given disappointing share-price performance. Hewlett-Packard Co. filed paperwork to split itself into two traded companies just a couple of weeks ago, and just yesterday, PayPal Holdings (formerly a unit of eBay) began trading as an independent company with its own listing.
Analysts from Bernstein opine:
Many of JANA Partners’ assertions of Qualcomm’s issues (i.e. that they are fat, that the corporate governance stinks, and that that they pay the senior executive staff too much) we wholeheartedly agree with. And it appears the company will be cutting costs, and (according to the WSJ) may be considering even more cash return.
However, we continue to believe that a split of the business, while it might seem nice on the surface (one only has to look at HP, or EBAY/PayPal to see examples of value creation from such moves) still is likely to be a value-destructive move on a standalone basis.