Qualcomm (NASDAQ:QCOM) brushed off calls from an activist shareholder to break up its chipset and patent-licensing businesses, arguing that keeping them together is in the best interests of shareholders. However, as the Wall Street Journal details, Qualcomm's profitable royalty business is coming under pressure from industry trade groups and competitors.
Hedge fund Jana Partners, which has invested $2 billion in Qualcomm and is one of its largest shareholders, wrote in a letter to investors that Qualcomm's chipset business is "essentially worthless" at current valuations.
In a statement, Qualcomm said its board and management regularly review the firm's corporate structure. "Prior reviews have concluded that the synergies provided by our business model create more value for stockholders than could be created through alternative corporate structures," Qualcomm said. "We will continue to evaluate opportunities to enhance stockholder value and are committed to pursuing the right course of action for all of our stockholders."
Qualcomm said that its future is bright and that its chipset business remains strong. The company pointed out that it is bringing mobile technologies to a wide array of industries, including automotive, healthcare, networking, smart homes, smart cities and wearables, among others.
"Our business continues to generate strong operating cash flows, and we are committed to the ongoing return of capital to stockholders while retaining the financial flexibility to execute on our business plans," Qualcomm said in a statement. The company noted that it recently significantly increased its stock buyback program to $15 billion, which it said is one of the largest capital return programs in the sector. Qualcomm plans to repurchase $10 billion of common stock within one year in addition to its current capital return commitments.
Qualcomm is the world's largest mobile chipset supplier, but around two-thirds of its profit comes from royalties it collects on patents from CDMA, LTE and other technologies used in phones around the world, whether or not they have Qualcomm's ships inside. Qualcomm has earned more than $50 billion in licensing revenues since 2000, according to the WSJ.
However, as the Journal notes, that royalty business is coming under pressure. In February, the Institute of Electrical and Electronics Engineers voted to change its policies in ways that could weaken the ability of Qualcomm and other patent-rich technology giants like Ericsson (NASDAQ: ERIC) and Nokia (NYSE:NOK) to collect royalties on standards-essential patents. Companies including Apple (NASDAQ: AAPL), Cisco, Intel, Microsoft (NASDAQ: MSFT) and Samsung Electronics battled against Qualcomm's position before the IEEE vote.
Those companies and their allies want industry groups to press patent holders to limit potential royalty rates before their technologies are chosen as standards, according to the Journal, rather than wait until the choice increases the value of their patents.
After looking at the issue for nearly two years, the IEEE changed its policies. For many years, the IEEE has encouraged companies to promise to license their patents to each other on a "fair, reasonable, and non-discriminatory basis." However, the IEEE had not defined what reasonable meant, letting companies negotiate royalty rates.
The new IEEE policies for the first time make "reasonable" rates tied to the "smallest saleable implementation" of a technology. As the WSJ notes, that could mean applying royalty percentages to the price of chips that carry out a particular function inside a device, which would reduce royalty rates significantly.
In the aftermath of the vote, Qualcomm was shocked. "A small, exclusive group of companies stacked each of the different rungs in the decision-making process," Sean Murphy, Qualcomm's vice president and counsel for international government affairs, told the Journal shortly before the final IEEE vote.
Qualcomm's opponents denied this and the IEEE said the process was fair. "There was plenty of opportunity for discussion and dialogue," John Kulick, who chairs the IEEE standards board, told the Journal.
- see this Qualcomm release
- see this FT article (sub. req.)
- see this WSJ article (sub. req.)
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