re: QCOM - Wireless Week on The SpinCo Spin
>> Will Qualcomm Still Spin Off Spinco?
By Peggy Albright
July 9, 2001
Wireless Week
wirelessweek.com
A year ago this month, Qualcomm decided to separate its semiconductor operations from the rest of its business.
It said it would break the technology giant into two public companies, keeping CDMA intellectual property rights and royalty-bearing ventures under the Qualcomm roof, while running the semiconductor and system software businesses under the auspices of the new company, temporarily called Spinco. The plan called for establishing Spinco and launching an initial public offering.
But Qualcomm wrote that scenario then, and this is now. Acknowledging the weakened stock market and diminished success of public offerings held in recent months, Qualcomm says it is re-evaluating the need for the IPO. The company says it still plans to spin off its chip business and distribute the stock among existing Qualcomm shareholders sometime this fall, at which time it will begin trading on the open market. Beyond that, Spinco inquiries have been met with silence.
Who Needs A Spinoff?
Some Qualcomm watchers, however, are questioning if the spinoff actually will proceed.
"They [now say] they're 'considering' spinning it off. The tone has changed," said ABN-Amro analyst Keith Bachman after attending a June 25 investor lunch in San Francisco hosted by Anthony Thornley, Qualcomm executive vice president and CFO, and Richard Grannis, vice president and treasurer. Bachman says Qualcomm's choice of words suggests a change in attitude. "To me it's not clear where they're going to go with it," he adds.
One factor that might affect the situation is last week's announcement of a cross-licensing deal with Nokia, which observers say will eliminate many of the intellectual property rights barriers with the No. 1 handset manufacturer that Qualcomm has sought to break down. (See related story on page 1.) "In my view, there's less need for the spinoff, based on this agreement," says Tim Long, wireless equipment analyst at Credit Suisse First Boston.
Ray Jodoin of Cahners In-Stat Group, which has the same parent as Wireless Week, says he's not convinced that the spinoff makes sense regardless of how you look at it. "I have a real tough time understanding where Qualcomm as a company is going to fit into everything if they spin that off," he says. "What is Spinco except a handful of designers that are getting things manufactured by other [fabricators]?"
That's not far off the mark, and now industry watchers may see a "will they or won't they" scenario emerge over the next couple months, with Qualcomm balancing its internal business needs against market realities.
Separating The Pieces
Good arguments can be made for separating the IPR and chip ends of the business because right now they operate at somewhat cross-purposes. Patenting technologies and licensing IPRs are by definition protective processes. Selling goods such as computer chips to technology partners often requires cross-licensing IPRs in a cooperative, royalty-free fashion. For example, the chip side of the house may not get all the access it wants to certain IPRs when barriers exist in the IPR side of the house. Spinco could negotiate such licenses itself if it separated from the parent company, without affecting the parent's ability to control and negotiate IPRs to the best of its advantage.
The Undisputed Leader, At Least For Now
Most observers laud Qualcomm as the undisputed leader when it comes to CDMA technology intellectual property rights, due to its expertise and its 75 percent to 80 percent market share for its chip products. But the company still doesn't own the second-generation CDMA chip market and actually could slip in terms of its future stake.
"Presumably that's not sustainable over the longer term," says Peter Friedland of WR Hambrecht regarding Qualcomm's market share. "It's probably not sustainable in any business, period."
Another factor is that the market for Qualcomm products derived from its main product line, cdmaOne, up through and including CDMA2000, essentially is limited. "It is a pretty finite market," says Gartner's Bob Egan. He estimates that the GSM evolution to wideband-CDMA will capture about 85 percent of the next-generation market share, and Qualcomm's third-generation technology, CDMA2000, will be left with the remainder.
Add to that the current softness in the handset market, which keeps pushing near-term sales forecasts down, and Qualcomm, like others, is fighting to maintain sales levels in an overall shrinking market. "Forecasts are continuing to come down and no one's forecast so far has turned out to be too low," says Bob Merritt, an analyst with Semico Research. That's not a good sign for any chip manufacturer.
Once current CDMA markets are satisfied, Qualcomm's business, like the rest of the world's, may hit a lull until W-CDMA takes off, Friedland believes. The W-CDMA market itself has problems, however, and already is seeing continued and extended commercialization delays, which postpone revenue.
Furthermore, Qualcomm's royalty position on W-CDMA is vague, which makes investors nervous. Despite Qualcomm's insistence that it will pull in W-CDMA royalties consistent with those it gets from CDMA and its evolutionary technologies, some, including analysts at Credit Suisse First Boston, say Qualcomm will receive lower royalties for chips put into W-CDMA phones.
This despite Qualcomm's hundreds of CDMA patents and its solid record defending those patents worldwide against companies such as Ericsson, NTT DoCoMo and Nokia. In Friedland's opinion, though, while some view Qualcomm's W-CDMA license position to be at risk, "there's no historical reason to think" it is, he says.
Supporting New Technology
Gartner's Egan predicts that Qualcomm will get more aggressive in its support of technologies and products that are not based on 2G CDMA or its successors. Look to Qualcomm's location services technology, which it acquired from SnapTrack Inc., for example. Benefits from that technology would accrue to both the parent company and to Spinco, which will embed the technology into its chip designs. And Qualcomm, through its new venture fund, is investing aggressively in new companies that will create new IPRs that can be sold via the chip business.
Egan thinks CDMA2000 1xEV, the next-generation data standard based on Qualcomm's high data rate technology, has been underestimated and that it will play a role in the emerging market for wirelessly enabled laptops. He also predicts that Qualcomm will get into the wireless local area network technology business to capitalize on the market for high-speed WLAN connections. He even expects it to develop chipsets that will enable a device to automatically search for, select and log onto the fastest network or least-expensive service when preparing to use data services. Operators are beginning to see this feature as a way to keep customers from turning their phones off in airports and hotels to use other high-speed wireless options.
In other words, don't count the company out, Egan warns. "When it comes to added value, futuristic thinking and generating new IPRs, those are the core attributes around Qualcomm," he says.
Sealing the deal with Nokia last week is just another reflection of those strengths and may help Qualcomm keep its chip business in-house. <<
- Eric - |
