Another Take>
Qualcomm, Ericsson unite
over new wireless standard
By Peter D. Henig
Red Herring Online
March 29, 1999
Quarreling wireless giants Qualcomm (QCOM) and
Ericsson (ERICY) have finally agreed to join hands.
The arrangement will make something of Qualcomm's
money-losing infrastructure business, while clearing the
way for a single new wireless technology standard.
Investors applauded the deal,
unlocking healthy gains in
Qualcomm's stock and Ericsson's
American depositary receipts
(ADRs).
The truce was announced last
week. Ericsson, as part of a
settlement of a long-running patent-infringement
dispute with Qualcomm, agreed to support
Qualcomm's code-division multiple access (CDMA)
wireless technology and will take over the Qualcomm
business unit that researches and builds infrastructure
products for cellular communications.
The financial terms of the deal
were not released, leaving
analysts to speculate about how
the numbers would play out in
each firm's future valuation.
However, the deal is sure to leave
the industry better off than it was
a week ago. Preliminary estimates
have Ericsson shelling out a cool
billion for Qualcomm's
operations.
With this truce, the groundwork is
now laid for the cellular communication industry to
move ahead with a new standard -- currently dubbed
3G, for third-generation -- around which the industry
can build compatible products for high-speed data and
video, as well as voice.
SETTING THE STANDARD
The deal makes sense all the way around.
Although Qualcomm introduced CDMA in the late
1970s, Ericsson had charged that Qualcomm's latest
version of the technology violated some Ericsson
patents for wireless technology.
CDMA has never dominated the world market for
wireless technology, but the new version is expected to
supplant the global system for mobile communications
(GSM) as the most popular format. To date, Nokia
(NOK.A) and Motorola (MOT), two of the top three
cellular handset makers, have started manufacturing
CDMA-compatible products. The third, Ericsson, had
adhered to GSM, which kept the market fragmented.
Following the Qualcomm/Ericsson news, it's likely that
CDMA will form the core of the new wireless 3G
standard, which will incorporate Europe's dominant
GSM technology while having the capacity to carry
digital traffic such as email.
GLOBAL EXPANSION
Now that Ericsson has its hands on Qualcomm's
infrastructure business, the Swedish firm will suddenly
be able to compete with CDMA equipment vendors
like Lucent Technologies (LU), Motorola, Nortel
Networks (NT), and Samsung, which are each vying
for a piece of China's multi-billion dollar mobile phone
market.
In 1998, China overtook the United States as
Ericsson's largest market, with more than $2.8 billion
in sales, but China had been leaning toward using just
CDMA technology in the future. Without this deal,
Ericsson would have found itself on the outside of the
Great Wall.
DIVIDE AND CONQUER
"It was a double whammy for Qualcomm," says Pete
Peterson, analyst with Volpe Brown Whelan.
According to Mr. Peterson and other analysts,
because the money-losing infrastructure group was
weighing down Qualcomm's balance sheet, and
because the industry hadn't yet cleared the way for a
single standard based on CDMA technology, many
investors had remained hesitant to commit to
Qualcomm for the long term.
This deal uncorked a lot of hidden value. It puts the
infrastructure business in the hands of a company that
can truly develop it, while allowing Qualcomm and the
rest of the industry to move forward and design for a
standard with no danger of it soon becoming obsolete.
"No one wanted to roll out the wrong technology,"
says Mr. Peterson, "but we were the guys who were
bullish on Qualcomm because of all of that potential."
Although most analysts agree that the pie just got
bigger for all players -- including the wireless carriers
like Sprint (FON) and AirTouch Communications
(ATI), whose revenues grow as more handsets are
sold into the market -- they are split as to how bullish it
will be for Qualcomm in the near term.
With a hefty run-up in its stock price -- at production
time, shares were trading at $114.84, up at least 13
percent in the past week -- investors may have gotten
ahead of themselves. Several unnamed analysts caution
that Qualcomm's handset business could still
disappoint rosy industry expectations. Although its chip
set and licensing revenue should continue to ramp
nicely, Qualcomm's handsets will be competing with
the marketing machines of Motorola and Nokia, and
that's stiff competition.
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