Four Developments to Watch as Embattled Qualcomm Seeks Path Forward
[Updated 3/16/18 3:30 pm. See below.] There’s never a dull moment these days at Building N, the San Diego headquarters of Qualcomm (NASDAQ: QCOM), the wireless technology giant and the world’s biggest maker of the advanced components used in smartphones.
In the days since President Donald Trump preemptively killed Broadcom’s (NASDAQ: AVGO) unsolicited offer to acquire Qualcomm, former chairman and CEO Paul Jacobs has moved to secure the financing needed to take the company private.
[Updated with Qualcomm board announcement.] On Friday, after Qualcomm’s board met to discuss the situation and what to do about Jacobs, the company announced that Jacobs would not be re-nominated to the board of directors at the upcoming March 23 annual shareholder meeting. Qualcomm said its board decided to withdraw Jacobs’ re-nomination after he had notified the board “he has decided to explore the possibility of making a proposal to acquire Qualcomm.”
If Jacobs can secure the necessary financing, Qualcomm added, “the Board will of course evaluate it consistent with its fiduciary duties to shareholders.”
For now, Qualcomm added, its board will consist of 10 directors instead of 11 at the annual shareholders meeting set for next Friday in the company’s big auditorium, on the ground floor of Building N.
Paul Jacobs is the scion of Qualcomm founder Irwin Jacobs, and succeeded his father as CEO in 2005. He later became executive chairman, but his role at the company has become increasingly polarizing in recent years, as Qualcomm’s antitrust and licensing battles proliferated—and as criticism of Jacobs and CEO Steve Mollenkopf intensified among activist shareholders.
Much of the trouble has coalesced around Qualcomm’s licensing business, which has triggered bitter litigation with longtime partners like Apple and Samsung, and prompted regulatory scrutiny in China, Europe, and the United States. To settle an antitrust inquiry in China, Qualcomm paid a $975 million fine in 2015. To settle other antitrust cases, Qualcomm paid South Korea $853 million in 2016 and Taiwan $773 million in 2017.
Qualcomm has maintained that its licensing practices are fair. But the way Qualcomm calculates its licensing fee is unusual. As James B. Stewart explained in The New York Times, customers like Apple are charged a percentage—reportedly about 5 percent—of the cost of the net selling price of an entire handset, and not the price of the Qualcomm chips inside.
Throughout its prolonged battle over Broadcom’s $117 billion buyout offer, Qualcomm has argued that Broadcom was just trying to take advantage of Qualcomm’s legal troubles and a slumping stock price to buy the San Diego chipmaker at a price far below the company’s potential value. But early returns in a shareholder vote for board members tied to the Broadcom bid suggest that shareholders blame Jacobs and Mollenkopf for embroiling Qualcomm in fights that have cost the company dearly. Both were reportedly running behind Broadcom’s slate of candidates for Qualcomm’s board before the president nixed the deal altogether.
Whatever Qualcomm’s potential value may be, the embattled company has been wounded and is struggling to move forward. Here are four key developments to watch in coming weeks:
1. What happens to Paul Jacobs, the former executive chairman and CEO, could serve as a key indicator of Qualcomm’s future as a public company. His efforts to line up the financing needed to take Qualcomm private could further polarize a board that was already under siege from Broadcom and activist shareholders.
2. Qualcomm’s Acquisition of Dutch chipmaker NXP Semiconductors. With its suite of chips designed for the automotive industry, NXP embodies Qualcomm’s plans to move into new growth markets—especially when it comes to developing the technologies needed for 5G networks and self-driving cars. But the deal already has dragged on for more than 16 months due to government regulatory reviews and holdout shareholders.
Qualcomm recently upped the price it will pay for NXP shares, from $110 to $127.50 per share in cash, and so far about 16.5 percent of NXP shareholders have tendered their shares. On Friday, Qualcomm extended its tender offer in its quest to secure at least 70 percent of NXP’s outstanding shares.
3. China’s regulatory approval of Qualcomm’s NXP deal. China’s Ministry of Finance is now the only outstanding regulatory approval remaining in Qualcomm’s quest to acquire NXP. The only question here is whether China might retaliate over President Trump’s move to kill Broadcom’s buyout of Qualcomm on national security grounds by opposing Qualcomm’s NXP buyout. Under President Trump several deals involving Chinese buyers of U.S. companies have been squelched following a review by the inter-agency Committee on Foreign Investment in the U.S., including Moneygram’s sale to an affiliate of the Alibaba Group, and Lattice Semiconductor’s sale to an investment firm with reported ties to the Chinese government.
4. Apple litigation. Apple sued Qualcomm in early 2017 over what it said was $1 billion in withheld rebates. Apple contends that Qualcomm had promised to pay the rebates as part of its agreement not to buy chips from other suppliers or to divulge Qualcomm’s intellectual property practices.
Jerome Dodson, the founder and CEO of Parnassus Investments, told The New York Times recently that if Qualcomm and Apple could just bury the hatchet, Qualcomm’s revenues would soar. By Dodson’s estimate, Qualcomm’s stock would climb beyond Broadcom’s tender offer at $79 a share, perhaps even beyond $84 a share.