[Will Nokia make the big push for CDMA?]
Forbes, Dec. 3rd.
forbes.com
Qualcomm close to choosing handset buyer
By Om Malik
NEW YORK. 4:40 PM EST-It's been a good year for folks who had the foresight last year to invest in Qualcomm (nasdaq: QCOM), the wireless chip and phone giant. The stock of the San Diego, Calif.-based company has been in a gravity-defying mode and is up 1,250% so far this year. Its backers should prepare for more good news in the next few weeks.
According to sources familiar with the company, Qualcomm is pretty close to finalizing a deal to sell it's large but unprofitable cellular phone handset business. The front-runners in this race to buy the $1.5 billion a year business are Nokia (nyse: NOK) and South Korean electronics giant Samsung, sources say.
Some Wall Street analysts are not ruling out Ericsson (nasdaq: ERICY). A Qualcomm spokesperson declined to comment on the speculation. "We hope to make an announcement before the end of the year," says Christine Trimble, senior manager, public relations at Qualcomm.
"It would make a lot of sense if it was Samsung," says Raj Srikant, telecommunications and networking equipment analyst with FAC Equities in New York. He argues that since Qualcomm already supplies Samsung with chipsets, there is a lot of synergy between the two companies.
"Samsung's handsets at the moment are at the low end of the business, while Qualcomm is viewed as a company with high-end products," says Srikant. While the final price tag on the handset division has not been determined, analysts such as Srikant comment that the final price tag would depend on the kind of deal Qualcomm gets to supply its chipset to the eventual buyer.
"The deal could certainly bolster Samsung in the U.S.," says Ed Snyder, telecommunication analyst with Hambrecht & Quist in San Francisco. Snyder rules out Nokia and points out that because Nokia already has a large market share in the U.S. and licenses technology from Qualcomm, there would be no additional gains for the Finnish-phone giant if it bought Qualcomm's handset division.
Earlier this year Qualcomm decided to dump unprofitable businesses and concentrate on its core businesses--chipsets and intellectual property related to CDMA technology. The 1999 run-up in Qualcomm's stock is prompted by a belief that the company controls the technology for future cell phone systems around the world, and that it will make loads of money on royalties and by selling chips to power those phones.
Qualcomm has already entered into a settlement with Ericsson whereby the Swedish telecommunications giant agreed to acquire Qualcomm's wireless infrastructure business, a money-losing operation that had weighed down the company's profits. With the infrastructure business off the books, Qualcomm saw its operating margins rise in the fourth quarter to 24.2%, up from 20.7% in the third quarter.
For fiscal 1999, nearly 37% of the company's sales came from the handset manufacturing operations, while 29% of its $3.94 billion sales came from its chipset and software business. During the same period, 11% of sales were generated from fees and royalties paid by the company's 75 licensees.
Kevin Landis, portfolio manager for First Hand Funds, doesn't rule out Ericsson, given that both companies are already negotiating and working on the sale of Qualcomm's infrastructure equipment business. "Anything can happen during talks," he says.
Either way, Landis is going to come out a winner. At the end of October 1999, his fund owned about 70,000 Qualcomm shares, making it the best performing stock in his portfolio. Landis is hoping that the company will get top dollar for its handset division.
"It could either be a large amount of money or a small sum for the division and a long-term deal for the chipsets," says Srikant. Either way, it is a derby in its final lap.
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