By Ted Greenwald
Qualcomm Inc. "stepped into" the escalating spat between the
U.S. and China. It is now grappling with the fallout.
The chip maker's chances of closing a critical acquisition
recently dimmed after China signaled it could block the deal. It is
in danger of losing a significant customer, ZTE Corp., after the
U.S. banned American companies from selling components to the
Chinese handset maker. Qualcomm is laying off 4.4% of its workforce
in an effort boost profits through cost-cutting. And it has to
convince shareholders it can deliver stand-alone growth after
government forced Broadcom Inc. to drop its takeover bid in
March.
The latest challenges come on top of continuing battles with two
of its biggest customers, including Apple Inc., and an attempt by
the son of a Qualcomm co-founder to take the company private.
Qualcomm is "in the wrong pace at the wrong time, I believe,"
said Steven Ré, investment chief at Fairbanks Capital Management
Inc., which holds Qualcomm stock. "They need something from China
when China is in a very serious negotiation with the U.S. that has
billions and billions of dollars of ramifications."
Qualcomm's most-recent round of troubles began after it took the
unusual step in January of inviting the Trump administration to
review a proposed $117 billion hostile takeover offer by Broadcom
on national-security grounds.
President Donald Trump blocked the deal, citing concerns that
Broadcom's management style could compromise Qualcomm's leadership
in 5G technology. The U.S. and China are rushing to dominate the
next-generation cellular technology, and one of Qualcomm's closest
rivals in the race is Huawei Technologies Co. -- a Chinese company
the U.S. has labeled a security risk and shut out of the nation's
smartphone market.
Last week, in what is widely seen as a tit-for-tat move amid the
two countries' broader tariff spat, Chinese regulators indicated
they were unlikely to green light Qualcomm's proposed $44 billion
acquisition of NXP Semiconductors NV. The deal, which has been
approved by regulators elsewhere, is a core part of Qualcomm's
future strategy. NXP would allow Qualcomm to expand beyond
smartphone components into automotive, security and connected
devices -- markets the company thinks will be valued at $77 billion
combined by 2020.
"The White House enabled Qualcomm to remain independent," said
Mike Walkley, an analyst with Canaccord Genuity Group Inc. A few
weeks later, he said, the same White House has escalated a trade
fight with China that may be disrupting Qualcomm's ability to get
the NXP deal done.
A spokesman for China's commerce ministry said in a briefing
Thursday the agency would review the deal "according to
antimonopoly law in an open, fair and impartial way."
Qualcomm also stands to lose access to ZTE after the Commerce
Department barred American companies from selling components and
software to the Chinese firm. ZTE, which makes smartphones and
networking gear, accounts for between 1.5% and 2.5% of Qualcomm's
revenue, according to estimates from Bernstein Research analyst
Stacy Rasgon. That would amount to as much as $560 million of
Qualcomm's revenue in 2017. ZTE has also partnered with the U.S.
chip maker in a series of 5G trials.
On Friday, ZTE said the ban would "cause damages to all partners
of ZTE, including a large number of U.S. companies."
The Chinese market is critical to Qualcomm's business, and the
chip maker has gone to great lengths to cultivate its presence
there. China supplied 65% of Qualcomm's $22.29 billion in revenue
last year, and it is home to several fast-growing handset
manufacturers.
Chief Executive Steve Mollenkopf in November joined Chinese
President Xi Jinping for the signing of a $12 billion deal to
supply chips to Chinese handset makers, and Qualcomm has formed
joint ventures to make chips with the Chinese Guizhou provincial
government and Semiconductor Manufacturing International Corp.
Qualcomm also has to fulfill ambitious profit goals executives
laid out in January, when they pledged to cut $1 billion in costs.
The San Diego company has initiated 1,500 layoffs in
California.
Staying independent also opened the door to former Chairman and
CEO Paul Jacobs's effort to try to take private the company his
father co-founded. Qualcomm's current directors received a
resounding vote of no confidence from shareholders earlier this
month.
Meanwhile, Qualcomm remains besieged by Apple, arguably its most
important customer, which is withholding billions of dollars in
payments as it battles the chip maker in court over patent-royalty
fees. It is waging a similar fight with Huawei, a significant
customer in China. Qualcomm, which holds patents on key cellular
technology, collects a royalty on nearly every smartphone sold
world-wide. It has paid fines to a number of international
regulators that deemed its rates too high.
The continuing turmoil has raised questions about whether
Broadcom and its chief executive Hock Tan would have cut a better
path through Qualcomm's many obstacles, some analysts said.
"This was Hock Tan's point -- things are not getting better,
they're getting worse," Bernstein's Mr. Rasgon said. "They're at
war with their biggest customers, their market is saturated, and
regulators are breathing down their necks."
Qualcomm shares ended Friday trading at $51.44, close to their
price a year ago and well below Broadcom's offer to acquire the
company for $79 a share. Qualcomm's stock is down more than 30%
since July 2014, when the company first disclosed difficulties
collecting patent royalties in China -- an early inkling of an
international wave of resistance to its patent-licensing troubles
that has yet to recede.
"The shareholders would have been better off with Broadcom,
that's obvious," said Tom Herzig, president of the investment firm
PR Herzig & Co., whose portfolio is about 2.5% Qualcomm stock.
But he is willing to give the company time to execute its strategy.
"If you fall down a flight of stairs you don't get right up and
start running back up."
Write to Ted Greenwald at Ted.Greenwald@wsj.com
(END) Dow Jones Newswires
April 23, 2018 08:14 ET (12:14 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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