Qualcomm Inc. received mixed reviews for its decision last week to scrap plans to spin off its chip division, with some observers not buying the company's rationale for retaining the unit.
According to at least one analyst, Qualcomm's move last week to create a separate wireless and Internet group to encompass its royalty business, and a CDMA Technologies Group to represent its chip-making efforts, pales in comparison to the benefits it would have realized from cutting its semiconductor division loose.
By divesting its chip business, Qualcomm would allow the division to independently pursue its merchant market push, said Edward Snyder, an analyst at J.P. Morgan Chase & Co. in San Francisco.
"We were disappointed by the move, and still believe that operationally these two very different entities in terms of margins would have performed better when separated under two separate management structures," Snyder said.
But Qualcomm, as well as some analysts, argue that the company no longer needs the IP licensing advantages that served as the spinoff's rationale.
"Last year we viewed the spinoff as necessary to minimize potential patent litigation that could arise as a result of Qualcomm selling multimode chipsets, including W-CDMA and GSM technology," said Irwin M. Jacobs, who will retain his position as Qualcomm's chairman and chief executive. "Since that time, we've entered into agreements that provide us considerable freedom to support the global expansion of the wireless industry by supplying integrated circuits and software that support one or more modes of CDMA as well as GSM."
Qualcomm has also recently encouraged cross-pollination between its IP and IC businesses, which offers another argument for keeping the chip unit under its umbrella.
"Qualcomm has been embedding a lot of software onto its chips, and wants to try to keep the tie together between the licensing division and the chip division," said Keith Bachman of ABN Amro in San Francisco.
The resignation last week of president and chief operating officer Richard Sulpizio, who was slated to serve as chief executive of the spinoff, wasn't perceived by analysts as a sign of weakness.
"In aggregate, we view the departure of Sulpizio as a disappointment, but don't believe it reflects internal trauma or business trends," said Scott W. Searle, an analyst at SG Cowen Securities Corp. in San Francisco.
But some speculation exists over whether Sulpizio left because he was disappointed over losing the chief executive position of the divested company or strongly believed in the long-term benefits of the spinoff.
Announced in July 2000, Qualcomm's spinoff was mainly intended to help the CDMA chipset leader enter the European GSM market. Previously, Qualcomm's handset customers-Ericsson and Nokia-had impeded its entry into the GSM market because they were only willing to license their technology to Qualcomm in exchange for its CDMA licenses.
The GSM element was crucial because CDMA 3G networks will largely offer a flavor of GSM capabilities, especially in Europe, where GSM represents the predominant wireless standard. The spinoff would have enabled Qualcomm's IC business to license GSM technologies without a forced cross-licensing agreement that it said its customers/competitors, such as Nokia, were pushing at the time the proposal was announced.
"One of the key drivers behind the spinoff was Nokia, and now that they have Nokia's and other GSM license agreements behind them, the reason for the spinoff has been taken off the table," ABN Amro's Bachman said.
The Nokia licensing agreements that offered Qualcomm favorable terms were also something that had already been concluded some time ago. "Qualcomm has said for months it was reconsidering the whole spinoff concept," Bachman said. "Jacobs' statement last week was basically the same sheet of music."
Meanwhile, Qualcomm, San Diego, continues to hold a relatively strong position in the current market climate. Its share price, for example, has held steady amid the share-price crash suffered by communications IC players across the industry, and unlike many top-tier IC players, it has reported only positive earnings during the last year.
"They're outperforming the other communications players, and in terms of earnings, they're holding steady," said Matthew Hoffman, an analyst at Wit SoundView Corp., Stamford, Conn.
But the near-term impact of delays in 3G network implementation in Japan and Europe, as well as slower-than-anticipated current-generation CDMA handset sales, took some of the upside out of the near term.
The company's long-term growth also largely hinges on yet-to-be penetrated markets for both its current -and previous-generation flavors of CDMA, said Mark McKechnie, an analyst at Banc of America Securities LLC, San Francisco.
"Qualcomm's footprint covers Asia, the U.S., and Latin America, but they have been virtually nonexistent in Europe," McKechnie said. "So there is a pretty significant upside potential in Europe when W-CDMA starts kicking in, although the 3G delay pushed out the timing of their penetration in Europe."