Cooters ---A FAIR writeup from the Motely Fool---Qualcomm Sells Handset Business to Kyocera
By Richard McCaffery (TMF Gibson)
Digital wireless communications company Qualcomm (Nasdaq: QCOM) surprised Wall Street last night by selling its handset business to Kyocera (NYSE: KYO), an electronics components manufacturer that's the leading shareholder in DDI Corp., one of Japan's largest telecom carriers.
Analysts had expected Qualcomm to sell its handset manufacturing business to one of the world's three leading cell phone companies -- Nokia (NYSE: NOK), Ericsson (Nasdaq: ERICY), or Motorola (NYSE: MOT).
Shares of Qualcomm slipped in trading because many wanted to see such a blockbuster deal.
Instead, Qualcomm sold its consumer phone business to a newly formed unit of Kyocera in exchange for a five-year commitment from the Kyoto, Japan-based company to purchase a majority of its code division multiple access (CDMA) chips and software from Qualcomm.
There are two things going on here. First, Qualcomm is shedding its handset manufacturing division to focus on what it does best -- design chips that are put into wireless phones and collecting royalties for its CDMA technology, a business that has extremely high margins.
CDMA, developed by Qualcomm, is one of three wireless transmission technologies, and the one that many think will become the industry standard because it's so good at sending data.
It's generally good news when a company divests operations to focus on its strength. Does Intel (Nasdaq: INTC) make computers? No, it makes microprocessors. Does Applied Materials (Nasdaq: AMAT) make chips? No, it makes the equipment that manufactures them. A major trend in the computer industry is the shift from vertical business models (companies that made and sold everything -- hardware, software, products, and services) to horizontal models (companies focusing on what they do best). This move has created fabulous wealth for shareholders.
In this case, Qualcomm is giving up a low-margin business even though it generates a lot of revenue. As the company said in September, "With increased competition, parts shortages, and industry consolidation reducing margins in consumer products, Qualcomm desires to transition the business to a manufacturer that will support its customer base and employees while providing economies of scale, a strong purchasing base, and other operating efficiencies." (Click here to read the full story.)
The second part is a strategy to seed the market with as many CDMA phones as possible to help establish the transmission protocol as the standard. With this deal and other recent moves, Kyocera expects to double the number of phones it manufactures, producing about 16 million in the fiscal year ending March 31, 2001.
CDMA is still a small part of the total wireless market, but it's growing fast. A Merrill Lynch estimate expects the number of CDMA phones to jump from 40 million this year to 70 million in 2000.
Some analysts wanted to see a deal with a top-three player to spread CDMA technology faster. But the technology is already spreading like wildfire, and Kyocera, with its strong foothold in Asia, should be able to provide a strong enough distribution channel to move sales along even faster.
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