Re: why would MOT want Q's handset division?>
QCOM: A Positive Case For Motorola or Nokia
Salomon Smith Barney
Friday, November 12, 1999
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--SUMMARY:--QUALCOMM, Inc.--Telecommunications Equipment * The case for MOT & NOK purchasing Qualcomm's mobile phone operations * Nokia & MOT can immediately convert the business from a unit generating an operating loss of $40 million to a unit generating $220 to $300 million in operating profit * Accretive to Nokia & Motorola if purchased for under $5 billion. * The purchase price is likely to be well below $750 million for the right strategic relationship. I.e. a long-term ASIC agreement. * Nokia can create $5-$7 per share in shareholder value, while MOT's market value could get a lift of $8-$11 per share. --EARNINGS PER SHARE-------------------------------------------------------- FYE 1 Qtr 2 Qtr 3 Qtr 4 Qtr Year Actual 09/99 EPS $0.30A $0.41A $0.75A $0.91A $2.47A Previous 09/00 EPS $N/A $N/A $N/A $N/A $4.00E Current 09/00 EPS $N/A $N/A $N/A $N/A $4.00E Previous 09/01 EPS $N/A $N/A $N/A $N/A $5.30E Current 09/01 EPS $N/A $N/A $N/A $N/A $5.30E Previous 09/02 EPS $N/A $N/A $N/A $N/A $N/A Current 09/02 EPS $N/A $N/A $N/A $N/A $N/A Footnotes: --FUNDAMENTALS-------------------------------------------------------------- Current Rank........:1H Prior:No Change Price (11/11/99)....:$345.50 P/E Ratio 09/00.....:86.4x Target Price..:$370.00 Prior:No Change P/E Ratio 09/01.....:65.2x Proj.5yr EPS Grth...:44.4% Return on Eqty 99...:48.9% Book Value/Shr(00)..:9.90 LT Debt-to-Capital(a)0.2% Dividend............:$N/A Revenue (00)........:4163.00mil Yield...............:N/A% Shares Outstanding..:159.0mil Convertible.........:No Mkt. Capitalization.:54934.5mil Hedge Clause(s).....: Comments............:(a) Data as of the most recently reported quarter. Comments............: --OPINION:------------------------------------------------------------------ We believe Qualcomm already has received several proposals from manufacturers that are interested in purchasing its mobile phone operations. Interested parties include top tier and 2nd tier handset manufacturers as well as other electronic companies such as offshore manufacturers of personal computers. The purpose of this note is to discuss why we believe it would make economic sense for either Nokia or Motorola to purchase Qualcomm's mobile phone business. Why would the two largest and most successful mobile phone manufacturers want to purchase Qualcomm's money losing operations? We estimate Motorola and Nokia can create $5-$7 billion ($8-$11 per share) and $6-$8 billion ($5-7 per share ) in shareholder value, respectively, by purchasing Qualcomm's mobile phone operations. Qualcomm sold 7 million phones and generated $1.47 billion in sales last year. However, it lost $40 million pretax on that revenue since Qualcomm does not have the scale manufacturing capabilities and purchasing power that is available to Motorola and Nokia, who will produce 55-60 million and 75-80 million units this year, respectively. Moreover, Qualcomm spends a tremendous amount of financial resources trying to build a brand to compete against two behemoths that can leverage their sales & marketing budgets across several technologies and geographic markets. Thus, Motorola and Nokia can take an operation that had a negative operating margin of just under 3% and immediately have it generate 15%-20% operating margins. In addition, Qualcomm phones will get an immediate boost by simply placing the Nokia or Motorola brand name on the front cover. Our shareolder value creation assumptions for Nokia and Motorola are based on Nokia's and Motorola's current price to earnings multiple on 2000 earnings and our view that operating margins at Qualcomm's handset business immediately move up to 15%-20% operating under the management of Nokia or Motorola. While the financial synergies and/or arbitrage are attractive, we believe there is a strategic case as well. Qualcomm's existing mobile phone line-up as well as those still under development would be complementary to both Nokia and Motorola. Nokia would be able to jump start its CDMA position, which is at least a year behind schedule. In fact, we believe Nokia's goal for 1999 was to sell about 5 million units, however, it will be hard pressed to break one million. Motorola, on the other hand, would be able to solidify its CDMA position against the successful entry by some of the Asian manufacturers such as Samsung. For the right strategic relationship, we believe Qualcomm is likely to part with its mobile phone operations for significantly less than $750 million since its primary concern is a strategic relationship. I.e. a long-term ASIC agreement. Based on the shareholder value creation that would be available to Nokia and Motorola as well as our belief that the transaction would be accretive to both companies' earnings at any purchase price below $5 billion, we believe there a strong likelihood that Nokia and Motorola are in the pole position to in acquire Qualcomm's handset business. |
