Does Qualcomm Need an Activist Intervention?

The word on Wall Street last week was that activist investor firm Jana Partners is pressuring Qualcomm (NASDAQ: QCOM) to consider a spinoff.
Jana’s key thesis is to break up Qualcomm’s two businesses, creating separate chip manufacturing and licensing companies. Beyond the split, though, it also wants the company to cut costs and buy back more of its own shares. Jana reportedly owns a $2 billion stake in Qualcomm, which would still be less than a 2% stake in the large tech company.
Qualcomm has been a pioneer in the development of chips for smartphones and tablets. Along the way, it has amassed a large portfolio of patents and upwards of 250 licenses that it’s also monetizing.
But Qualcomm has fallen on hard times of late, with shares down 15% over the last 12 months. This comes after it lost deals with Apple (NASDAQ: AAPL) and Samsung (OTC: SSNLF). Then, of course, there was the antitrust issues in China, which Qualcomm has since settled by paying a fine and lowering its royalty rates for Chinese sales.
Qualcomm can be a misunderstood business at times, too. Sure its chip making business generates nearly 75% of its revenues, but the bulk of its actual earnings come from the higher-margin licensing business. Chip making only accounts for about 40% of Qualcomm’s earnings before taxes.
The case can be made that there are synergies by having the two businesses together.
Qualcomm’s chip making segment is ultimately what “builds” the intellectual property that it licenses. It then turns around and uses the cash it generates from licensing to optimize its chip making business.
Conversely, there is some benefit to a breakup.
One is that the two companies could be run independently and would be free to pursue markets where they have the best growth opportunities. The second benefit relates to some of the questions that were raised by Chinese authorities, as to whether Qualcomm can refuse to sell chips to companies that don’t license its patents. A separating of the businesses would do away with any potential conflicts like that.
Regardless, the big positive is that Qualcomm is becoming much more of a total return story, with dividend increases and buybacks. It has upped its dividend for 12 straight years and now offers a 2.8% dividend yield – the highest yield ever for the company.
This comes after it upped its quarterly dividend by 14% last month. It also announced a $15 billion buyback program, where it plans to buy back $10 billion worth of its own shares over the next year. But Jana Partners is pushing Qualcomm to buy back $15 billion in shares over the next six months.
From a valuation perspective, it’s hard not to like Qualcomm. Shares trade at a price/earnings ratio of 14, which is the lowest we’ve seen in nearly 15 years. That’s also a hefty discount to major peers like Broadcom (NASDAQ: BRCM), Texas Instruments (NYSE: TXN) and Nvidia (NASDAQ: NVDA) – all of which trade with P/E ratios above 20.
A split of its two businesses is something that Qualcomm looked into back in the early 2000s, but it ultimately decided that it just wasn’t worth it. So, look for the company to fight back against the activist intervention.
And there’s no reason Qualcomm can’t generate even greater shareholder returns going forward. Especially when it has no debt and is still generating impressive levels of cash flow. It’s only paying out 40% of earnings via dividends and has enough cash to cover over 15% of its market cap.
Regardless of what happens, Qualcomm certainly looks interesting for long-term investors.

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