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Hedge fund wants Qualcomm to break up

It's a scheme to run up stock, which is up sharply this morning

Activist investment hedge fund Jana Partners this morning (April 13) said it wants Qualcomm to consider spinning off its chip unit from its patent-licensing business. Qualcomm stock is up more than 5 percent in pre-opening trade. Jana owns $2 billion of Qualcomm stock.

Jana sent a letter this morning, making suggestions for the company to run up its stock price. Just last month, Qualcomm announced a $15 billion stock buyback aimed at driving up the stock price. According to Yahoo.com, Jana says Qualcomm's chip unit is "essentially worthless." The patent-licensing part of Qualcomm accounts for most of its profits.

Jana wants Qualcomm to cut costs, accelerate stock buybacks, and make changes in its executive pay structure, financial reporting, and board of directors.

It's not clear how Jana wants executive pay to be changed, but in March of last year, Steve Mollenkopf took over as chief executive from Paul Jacobs, who became executive chairman. According to Bloomberg Business, Mollenkopf and Jacobs were paid a stunning $117.7 million last year (combined). However, the two will reap some of these gains in later years.

Jana says it has had a "constructive dialogue" with Qualcomm. In its letter, Jana wants Qualcomm to address its "historical underperformance and improve investor perceptions of the company."

Nobody asked me, but I consider the mentality of the Jana letter to epitomize the problem with capitalism these days. Wall Street's focus is only on the stock price. It's not on the performance of the company. Jana's letter represents quintessential financial engineering suggestions. I can remember the day when intelligent companies believed that the most important duty of management was to build a solid company, and the price of the stock would take care of itself. Since the 1980s, the focus has been completely on making moves that will run up the stock. This will end badly.

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Activist investment hedge fund Jana Partners this morning (April 13) said it wants Qualcomm to consider spinning off its chip unit from its patent-licensing business. Qualcomm stock is up more than 5 percent in pre-opening trade. Jana owns $2 billion of Qualcomm stock.

Jana sent a letter this morning, making suggestions for the company to run up its stock price. Just last month, Qualcomm announced a $15 billion stock buyback aimed at driving up the stock price. According to Yahoo.com, Jana says Qualcomm's chip unit is "essentially worthless." The patent-licensing part of Qualcomm accounts for most of its profits.

Jana wants Qualcomm to cut costs, accelerate stock buybacks, and make changes in its executive pay structure, financial reporting, and board of directors.

It's not clear how Jana wants executive pay to be changed, but in March of last year, Steve Mollenkopf took over as chief executive from Paul Jacobs, who became executive chairman. According to Bloomberg Business, Mollenkopf and Jacobs were paid a stunning $117.7 million last year (combined). However, the two will reap some of these gains in later years.

Jana says it has had a "constructive dialogue" with Qualcomm. In its letter, Jana wants Qualcomm to address its "historical underperformance and improve investor perceptions of the company."

Nobody asked me, but I consider the mentality of the Jana letter to epitomize the problem with capitalism these days. Wall Street's focus is only on the stock price. It's not on the performance of the company. Jana's letter represents quintessential financial engineering suggestions. I can remember the day when intelligent companies believed that the most important duty of management was to build a solid company, and the price of the stock would take care of itself. Since the 1980s, the focus has been completely on making moves that will run up the stock. This will end badly.

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Comments
51

Don, the catch phrase behind all these proposals is that adoption will "increase (or maximize) shareholder value." Recently there has been pressure on Pepsico to dismember itself into two companies, one a beverage company, and the other one a snack provider. I've watched too many of these spin-offs that were undertaken in the name of rationalization come to little or no good. This proposal reminds me of the spin-off of Agilent Technologies from Hewlett-Packard. That old instrumentation business was seen as a drag on H-P's newly hatched emphasis on computers and peripherals. In the intervening twenty years, Agilent has itself been playing a Monopoly game with smaller companies and firms and seems to be doing just fine. But what of H-P? Well, not so good at all, and its survival is in doubt.

The big-time operators love to break up companies (for a fee) and to arrange mergers (for a fee.) Excuse my skepticism here, because if one part of Qualcomm is worthless, what is the point of cutting it loose? Will stock in it ever be worth anything? Shortly after Qualcomm went public, it spun off its wireless operation, Leap. And shortly afterward, Leap went belly-up. The pre-BK stock was worthless, even when Leap was reorganized. That spin-off did Qualcomm shareholders no good at all.

There is a small positive in this proposal, the desire to "make changes in its executive pay structure." That should imply less going to the execs and more accruing to the stockholders. In this case, that would be a generally positive step.

April 13, 2015

Visduh: Yours are words of wisdom. There have been a lot of corporate breakups of late, engineered by greedy Wall Streeters who will get rich from the fees generated by the move.

Thanks to the "activists" (hedge funds, private equity operations, etc.) eBay is spinning off its PayPal unit (the best part of the company), General Electric says that over a couple of years it will get rid of its finance unit, duPont is under pressure to split up, etc.

If a company is going to dump one of its subsidiaries, it should do so for operational reasons -- not to please Wall Street crooks. Since early 2009, the stock market has zoomed, almost entirely because of financial engineering. First, the Federal Reserve and other world central banks have been printing money frenetically. Liquidity has soared, There is money everywhere and it is finding its way into financial assets. Also, corporations are making phony moves to drive up their stocks, so grossly overpaid executives can rake in even more, and Wall Street can be appeased.

As you say, it is done for "increasing shareholder value." How about "improving the long-term prospects of the company?" Nah -- that will never sell in these greed-sated days. Best, Don Baudeer

April 13, 2015

And since the Agilent spinoff from HP for some reason Agilent spun off its test equipment line into something called Keysight.

April 13, 2015

ImJustABill: The more spinoffs, divestitures, acquisitions -- shuffling of cards -- the more money for Wall Street. And that's money that could be used to bolster the company and help the economy, not just enrich a few billionaires on Wall Street. Best, Don Bauder

April 13, 2015

Billionaire Carl Icahn originally had strongly suggested to eBay over a year ago that they spin off PayPal. But the company's board rejected his recommendation. But eventually they came around and voted to do just that. Icahn's reasoning is that the separated companies can then grow much faster. PayPal will reportedly now go after deals with other big e-tailers like Amazon, Alibaba, etc., which wouldn't do business if PayPal stated married to eBay. P.S. I don't use PayPal much, but I've been a member since their startup, and have the MasterCard PayPal debit card. I believe the READER uses PayPal to pay writers of travel stories. I would vote for payment of all READER articles via PayPal. ;-)

April 13, 2015

dwbat: Icahn and other sharks like him always say that a spinoff, divestiture, etc. will be good for the company. But the sharks' only interest is what will be good for them, and that's an increase in the stock price (plus investment banking fees for those handling the deal.) Best, Don Bauder

April 13, 2015

There are tremendous costs in these transactions. The workforcehas to learn new methodologies and adapt to a new corporate culture. Complicated customer and vendor relationships which have been nurtured over years all need to be rebuilt. Hi tech businesses aren't just giant Legos that can be moved around without costs.

Of course, people like Icahn are the ones who collect money from the transaction so of course they don't have a problem with it.

April 13, 2015

ImJustABill: Many studies-- including those done by Wall Street firms -- indicate overwhelmingly that the worst way for a company to grow is by acquisition. But mergers and acquisitions keep burgeoning, for a number of reasons: 1. Wall Street, hedge funds, private equity funds ad nauseam. pressure the companies into making them; 2. CEOs know their salaries will grow if the company makes an acquisition that adds to revenue; 3. The stock tends to go up significantly when one company buys another.

So the deals keep being made despite the fact that most backfire. Best, Don Bauder

April 13, 2015

Well, of course, Icahn is out for himself. That's how he got so rich. Same with the sharks on "Shark Tank"; the deals made on that show are always in the sharks' favor.

April 13, 2015

dwbat: You have to expect everybody to act in their own economic interest (although there are some exceptions, usually spawned by ignorance.) The problem is that Wall Street, which controls so much of the wealth, also controls Congress and branches of government at every level, including regulators and the courts. Our situation is worse than it was in the time of the Robber Barons, who controlled politicians at every level.

We need a Teddy Roosevelt. And a media that will point out that wealth and income inequality is destroying us. The economy is doing poorly (despite six years of zero short term interest rates) because consumption is down. And consumption is down because the wealth and income is concentrated at the top. The middle class has neither the wherewithal nor credit access to consume at the rate it has in the past. That's why we may be headed into a destructive deflation, following the paths of Europe and Japan. Best, Don Bauder

April 14, 2015

I agree 1000 percent about the need for another Teddy Roosevelt. But I don't see one coming, do you? It sure won't be Hillary.

April 14, 2015

dwbat: Yes, we need a Teddy to do things like busting trusts. But he had a flaw: he loved war. We don't need that aspect of Teddy. Best, Don Bauder

April 14, 2015

Qualcomm brought some great innovations long ago. Long ago. They discovered new algorithms to encode cellular communication efficiently. Their IP properties are no longer interesting but they are essential building blocks for newer technologies. These should bring in sales for a couple of years at least. One must allow for other developments that could supersede the need for their technology.

At the hardware end, chip technology has left them behind. Some big buyers have moved on. Samsung is becoming a powerful competitor. Unless Qualcomm has significant new discoveries ready to emerge, I don't see much growth in their near future.

April 13, 2015

Anyone remember its failed live video service called FLO TV? That was a lame product from the getgo. But even after bad reviews [including mine] Qualcomm tried to keep it going. Wrong move! At least the company was able to sell off the spectrum to AT&T for a huge $ amount, so it wasn't a total loss. Maybe their next product with be urban porta-potties with WiFi!

April 13, 2015

dwbat: Qualcomm's big winners have been its CDMA businesses. They produce juicy royalties. Best, Don Bauder

April 13, 2015

swell: If Qualcomm separates its two businesses, would you buy stock in the chip company?

Ask the same question about the newspaper industry. A number of companies such as Tribune have split into two enterprises: broadcast and newspapers. Who would buy stock in the newspaper company? Best, Don Bauder

April 13, 2015

I've heard the LA TIMES does turn a profit. And Warren Buffet owns several newspapers, but only in smaller markets (including The Tulsa World). He must know something we don't.

April 13, 2015

dwbat: Buffett's Berkshire Hathaway owns the Bufalo newspapers, along with a few others. About seven years ago, Buffett declared that newspapers were a lousy investment. (I wrote a column on that.) Then a few years later when newspaper prices got much lower, he began buying some, although they are not a large part of his portfolio.

Newspapers in smaller markets are, in the main, doing much better than metro dailies. The major reason is that the smaller papers don't have as much Internet competition. Best, Don Bauder

April 14, 2015

Buffett sounds like a used car dealer, talk down the trade in, get it cheep and then sell it to some other sucker.

April 14, 2015

Murphyjunk: Most conglomerateurs are like used car dealers. But I definitely would not say that of Buffett. He has done a great job with Berkshire Hathaway and is an economic statesman. Best, Don Bauder

April 14, 2015

could it be he uses his influence ( people listen to him) to manipulate the market ?

April 16, 2015

McDonalds should get rid of their essentially worthless hamburger and fry selling businesses. The soda selling business accounts for most of their profits.

April 13, 2015

I thought there was huge markup on their salty fries.

April 13, 2015

dwbat: I first ate at McDonald's in about 1959. I would get three burgers, fries, and a milk shake for $1.25, as I recall. Best, Don Bauder

April 13, 2015

ImJustABill: The last time I bought a McDonald's hamburger was when my wife and I were stuck in an airport with little time, and there was no other option. Yours are the exact words I used: "worthless hamburger." Ughh! It was awful. Best, Don Bauder

April 13, 2015

QUALCOMM STOCK CLOSES DOWN FOR THE DAY. Stock of Qualcomm shot up as high as $71.90 when word got out that Jana Partners was pushing for a breakup.

But Qualcomm stock closed down on the day -- at $68.73, down 43 cents from Friday. Normally, stocks get a goose when there is talk of financial engineering. There are several reasons Qualcomm's bump-up possibly didn't last: 1. The overall market slumped during the day; 2. Even though financial news focused on Jana and Qualcomm throughout the day, investors and speculators may have concluded that Qualcomm will nix the suggestion; 3. People may have pondered who would buy the stock of Qualcomm's chip operation. Best, Don Bauder

April 13, 2015

Maybe they could sell the chip operation to Frito-Lay, as that company makes really good chips!

April 13, 2015

But only after Frito-Lay is spun off from Pepsico.

April 13, 2015

Visduh: Wall Street is salivating about that possible spinoff already. Best, Don Bauder

April 13, 2015

dwbat: There is another possibility: a company named Buffalo Chips. Best, Don Bauder

April 13, 2015

Maybe Nabisco could buy Qualcomm's chip operation, then merge the brand with Chips Ahoy!

April 13, 2015

dwbat: Pass your idea to Goldman Sachs. Maybe you will get a finder's fee. Best, Don Bauder

April 14, 2015

Here was QCOM's statement. I think this is more or less corporate-speak for "Go F yourselves Jana"

"Qualcomm welcomes input from our stockholders, including JANA Partners, and we are firmly committed to maintaining an active dialogue with all stockholders and to acting in their best interests.

Our opportunities remain strong. Our innovations have made smartphones the most pervasive technology of our time. They come to market through our inclusive licensing program and our cutting-edge chipsets and continue to play an integral role in the expansion of the mobile industry. We are now bringing the benefits of mobile technologies to new areas such as automotive, healthcare, networking, smart homes, smart cities, and wearables among others.

Our business continues to generate strong operating cash flows, and we are committed to the ongoing return of capital to stockholders while retaining the financial flexibility to execute on our business plans. We recently significantly increased our stock repurchase authorization to $15 billion, one of the largest capital return programs in the sector. We plan to repurchase $10 billion of common stock within one year in addition to our current capital return commitments. Since inception, we have exceeded our minimum capital return target of 75% of free cash flow.

Our Board of Directors and management periodically review our corporate structure. Prior reviews have concluded that the synergies provided by our business model create more value for stockholders than could be created through alternative corporate structures. We will continue to evaluate opportunities to enhance stockholder value and are committed to pursuing the right course of action for all of our stockholders."

April 13, 2015

ImJustABill: Yes, you sized it up pretty well. This is flipping the bird in corporatespeak. Actually, Qualcomm itself has twice considered spinning off its chip unit. In those cases, I don't think someone from Wall Street was pushing the company, but I may be wrong. Best, Don Bauder

April 14, 2015

You should have instead eaten the paper the burger was wrapped in! It's more nutritious and tastes better.

April 14, 2015

dwbat: I never thought of that. But since my wife and I swore we would never eat there again, I won't be able to try out your idea. Best, Don Bauder

April 14, 2015

Whatever happened to a business strategy just being: Make a product people want, build a better product for less money than your competitor, and promote your product properly?

April 14, 2015

ImJustABill: Amen. To make a breakthrough product requires engineering. But corporations today are mostly interested in financial engineering. Best, Don Bauder

April 14, 2015

And don't forget marketing. Microsoft made $billions being a marketing company, i.e., putting out average software products but then promoting them via $millions in advertising to make the software appear Grade A. Same with many other types of companies. As they say, "put some lipstick on that pig."

April 14, 2015

dwbat: I agree with you on Microsoft. The company should have bounced Ballmer long before it did. Then when he left, he paid $2 billion for a professional basketball team, the L.A. Clippers. If the past is prologue, bet against the Clippers. Best, Don Bauder

April 14, 2015

Yeah MS has never been known for great software. Personally I think Office is a decent product - Windows has long been a bug-riddled mess of an OS compared to much more stable Unix, Linux, and Apple OS.

But as you say MSFT's biggest skill was in marketing their products - and in particular bundling their products in ways which drove out competitors (e.g. Netscape) and somehow squeeked by antitrust regulators.

April 14, 2015

MS's Microsoft Money was a piece of crap, and Quicken ate their lunch. The boneheads at MS could never fix the software, so tried to buy Quicken but thank goodness the Feds stepped in and put the kibosh on that.

April 14, 2015

dwbat: IBM handed Microsoft a market, and Microsoft has done comparatively little to expand beyond it. Best, Don Bauder

April 15, 2015

ImJustABill: It isn't difficult to get by antitrust regulators these days, because antitrust activity is barely visible in the U.S.. Best, Don Bauder

April 15, 2015

The new economy for the middle class - oh, what middle class . . .

April 14, 2015

AlexClarke: The middle class is disappearing. Nothing is being done to arrest this dangerous decline. The result will be a collapse, but it won't come right away. Best, Don Bauder

April 14, 2015

AlexClarke: Well said. WHAT middle class? I can remember Milton Friedman telling me decades ago that a strong economy needs a middle class. Best, Don Bauder

April 14, 2015

The future of Qualcomm is robotics and drones. Like the cellular revolution, the next-generation of processors will make the unimaginable possible.

April 15, 2015

Ponzi: I would guess the company is spending time plotting its possible future markets. Any company that fails to do that is on its way to perdition. Best, Don Bauder

April 16, 2015

I'm guessing they'll also venture into advanced medical technology.

April 16, 2015

dwbat: There could be tough competition in robotics, drones, and advanced medical technology. Qualcomm will take that into account. Best, Don Bauder

April 16, 2015

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