Why Qualcomm Never Broke Up
- Why did QUALCOMM, Inc. (NASDAQ: QCOM) decide not to break up the company?
- In a report issued Tuesday, Detwiler Fenton analyst Jeff Johnston shared the firm’s take.
- Summarizing, the experts believe the company decided not to break up due to the “interdependencies of the two groups, and the leverage they will have when 5G becomes a reality.”
In spite of the considerable pressure exerted by a shareholder activist and the regulatory investigations still in progress, Qualcomm announced on Tuesday that it had decided against splitting up the company. Below is Detwiler’s take on the issue.
A Juicy Apple
Detwiler’s experts believe Qualcomm’s business at Apple Inc. (NASDAQ: AAPL) is in good shape for a couple of years to come. However, they added, the tech behemoth has been developing its own baseband for quite some time now.
If it succeeds in it, Qualcomm’s QCT division would be hit hard – the report cited the impact of Samsung’s (OTCMKTS:SSNLF) decision to use its own chips for the Galaxy S6 on QCT margins as a precedent.
So, the analysts argued, if Qualcomm thought its business at Apple was at risk, “spinning off the chipset division before that happened might be the right strategy." Going forward, Detwiler says Qualcomm has neutralized that risk.
Other Reasons To Avoid A Break Up
The experts went on to look into other reasons for Qualcomm to avoid a break up. “Agreements with handset OEMs have QTL and QCT components - a split would be disruptive to the business,” they added.
Many of the agreements with chipset customers also comprise a licensing provision. If the company were to split, the agreements would need amendments, and this could be potentially disruptive to the business.
They continued that the impact on the IP pipeline for QTL would be negative, since a considerable number of the patents come from QCT engineers.
Finally, looking forward -- to 5G -- Qualcomm will be capable of leveraging its 5G IP to drive 5G MSM sales at wide margins. The firm anticipates 5G phones will start shipping in two years, and analysts have no doubt that Qualcomm “will hold a number of essential 5G patents."
"Like they have done in the past, they will be in a position to leverage the combination of their 5G patents, and 5G chipsets to drive favorable terms for the business,” the note concluded.
Including after-hours trading, Qualcomm traded up more than 3 percent on Tuesday.
Disclosure: Javier Hasse holds no positions in any of the securities mentioned above.
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