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Strategies & Market Trends : Gorilla and King Portfolio Candidates -- Ignore unavailable to you. Want to Upgrade?

To: Rick who wrote (6498)	9/17/1999 7:34:00 PM
From: Tom Ardnij	Read Replies (1) \| Respond to of 54805

Thread-What follows is Salomon's Smith Barney's write-up yesterday on Qcom. It makes for interesting reading, especially the conversation on potential suiters. We continue to recommend Qualcomm with a 1-H rating. Yesterday Qualcomm held an all day analyst meeting in New York to outline its long term growth strategy that increasingly is becoming to sound more and more like a fabless semiconductor company whose core competencies are based on telecommunications and CDMA in particular. In fact, Quaclomm's technology and patent portfolio represents critical enabling technology for the development of third generation wireless networks. In off-line discussions with the company, we get the impression that there are at least 4-5 potential suitors for the company's mobile phone operations. While the talks are preliminary, there is a great level of interest from European and Japanese mobile phone manufacturers as well as manufacturers currently not in the mobile phone business. The company that needs Qualcomm's mobile phone operations the most is Ericsson though Ericsson's current gearing and negative cash flow would prevent it from duplicating previous successful handset acquisitions it had consumated such as the purchase of GE's and Orbitel's mobile phone operations that essentially put the company on the map. Nokia could use Qualcomm's CDMA know how as well because despite its world class status in the mobile phone market, it still is a bit slow off the blocks when it comes to CDMA. However, marketing and psychological road blocks make this outcome unlikely as well despite Nokia's cash rich balance sheet. A more likely partner would be a Phillips or a Siemens that must do something bold in order to become a major player in an industry that is in desperate need of consolidation. The issues that will determine price is the buyers view of the cost to catch up to a fast moving wireless industry balanced with Qualcomm's willingness to sacrifice the ultimate price in exchange for other concessions that would benefit Qualcomm's other businesses. For example, Qualcomm would accept a lower price from a world class manufacturer in exchange for minimum guarantees of that company's future ASIC requirements. In fact, in our view the small probability of a Nokia agreement would rest on a very low purchase price offset by a promise from Nokia to use Qualcomm's ASIC. However, we believe this event has an extremely low probability though would be a bold one for both parties. Regardless of the event, Qualcomm would be transformed into a fabless semiconductor company with critical enabling technology for the fastest growing digital standard today and for third generation wireless technologies of the future. Based on this transformation that could occur as early as the end of this year, we believe Qualcomm could ultimately be worth twice as much as it is today. While our price target is only $210, we believe a double still is possible. Left would be a company growing 40%-50% each year with total revenue and royalty fees of $2.4 billion and pretax income of about $1.2 billion or 50% PRETAX margins. Companies with similar strategies currently trade anywhere from about 15 to 30 times revenue, indicating at the low end Qualcomm could be worth $190 and at the upper end $370. Since we believe the market opportunity of wireless comminucations far exceeds that of the DSL players at the upper end of the valuation range, we believe Qualcomm's ultimate potential is at the upper end of the range. We continue to recommend Qualcomm wth a 1-H rating. ----------------------------------------- Best Regards, Tom