Qualcomm Spinoff Gives Company A Cleaner Look
By JANET WHITMAN
(This report was originally published late Tuesday.)
NEW YORK -- Wireless technology leader Qualcomm Inc. (QCOM) suddenly looks a lot cleaner after announcing Tuesday it plans to spin off its chipset business.
The move will divide the company into two main divisions: the spinoff, which will make chipsets, and the remaining business, which will control the company's intellectual property. That will enable the spinoff to pursue new wireless technologies - specifically GSM - while at the same time shielding Qualcomm's royalties generated by its valuable CDMA wireless technology.
"The two main divisions were encumbering each other," said Chase H&Q analyst Ed Snyder, who upgraded his rating on Qualcomm's stock to buy from hold following the announcement.
Because of its dominance in CDMA technology, Qualcomm has had difficulty obtaining cross-licensing agreements which would allow it to pursue GSM, the dominant wireless technology in much of the world, analysts said.
"From the point of view of Spinco" - the temporary name for the company - "it's good because it will be able to go after the technology they need to put in their multi-mode, multi-band chips, which will be very important for 3G (third-generation) applications and 3G handsets," said David Toung, an analyst with Argus Research.
"For them to survive, they were going to have to get some GSM property," said Snyder of Chase H&Q. "They don't own any."
Qualcomm plans to assign a portion of its patents to Spinco, which Spinco intends to use to gain access to GSM and other technologies by negotiating cross-licenses. At the same time, Qualcomm can continue to collect royalties and develop its own intellectual property on CDMA.
"The royalty guys are going to give the chip makers a few patents and send them on their way, which they can go out and horse trade for other technologies," said Snyder. "Meanwhile, back at the ranch, the licensing guys will sit back and collect royalties."
Separating the two businesses will allow each to focus on what it does best, analysts said.
"There are plenty of opportunities for high-speed data and Internet access and all sorts of applications for wireless," said Toung at Argus.
Spinco also could pursue acquisitions that benefit the business and "doesn't have to worry" if they use CDMA technology, said Snyder. Before, because of Qualcomm's dominant position in CDMA, that would have been seen as creating competition against itself.
Snyder also noted that, without the chipset business, Qualcomm stock may be valued at a higher multiple to earnings. "It looks a lot better on paper without the chip business," he said.
Some analysts also noted that the move by Qualcomm may deflect attention away from recent concerns that the company's patents can be skirted.
Qualcomm shares rallied on the news of the spinoff, ending up 7.5% at 68 3/8 on volume of 23.9 million shares, compared with average daily volume of 21.6 million shares.
-By Janet Whitman; Dow Jones Newswires
201-938-5248; janet.whitman@dowjones.com
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