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Now that you've had some time to digest the news of the spin-off, I thought you might be interested in a consolidated wrap-up of the information I sent to a few friends and relatives who don't follow this thread.

The Logistics

Today a wholly owned subsidiary was formed call Spinco. (An admission that they haven't thought of a good name yet for the spin-off.) Later this fall, 10% of that company will be sold to the public in an IPO. The lead underwriter will be Goldman Sachs, a major underwriting house that gives huge credibility to Q. Qualcomm will probably recieve at least $1 billion for the company prior to paying underwriting fees. That put a total market value of at least $10 billion on the new company. About a year later the 90% of the shares not sold to the public will be distributed "in a tax-free distribution" to Qualcomm shareholders.

To give you an idea of the relative size of Spinco, its pro forma revenue during the last 9 months is $960 million. The pro forma revenue during the same period for the business not being spun is $1.2 billion. In other words, about 45% of the current business will be spun off.

What will Spinco's core business be?

It will sell CDMA- and HDR-based chip sets and ASICs (the circuit boards that make it possible to send and recieve CDMA signals.) It will also develop new software products used in those chip sets as well as new patents for GSM/CDMA multi-mode voice and data devices. SnapTrack products will also be sold and improved upon by Spinco.

What will Qualcomm's core business be?

It will continue to develop new patents to foster the adoption of CDMA while it continues with business as usual with the DIgital Cinema product line (not yet on the market) and the OmniTracks product line.

Why create and spin off Spinco?

In Gorilla-Gaming terms, the formation of Spinco as an independently operating company is tantamount to adding a hugely important link to Qualcomm's value chain. This strengthens Qualcomm's value chain even more than when it sold the infrastructure division to Ericsson and when it sold the handset division to Kyocera. That's because the chips Spinco will manufacture will be sold to both of those companies.

The big-picture stuff is that each company will be able to concentrate on its core competencies. Qualcomm will concentrate on increasing the patent portfolio. Spinco will concentrate on producing and selling 3G multi-mode products. As an example, the new CEO of Spinco said that he believes Spinco will be able to improve HDR and market it at lower costs than under the current situation.

Right now, Qualcomm is in a sticky position of having to sell to competitors, never a great position to be in. Because Spinco will be selling the infrastructure and handset chips, Qualcomm will no longer be selling to competitors such as Nokia and Motorola who also make CDMA-based chips, though rather unsuccessfully.

As the world migrates to W-CDMA, Qualcomm right now anticipates having to enter into cross-licensing agreements with the likes of Nokia. The holders of important GSM-based patents would trade some of them in return for CDMA-based patents from Qualcomm. That lowers the net revenue Qualcomm can get for its CDMA-based patents needed for W-CDMA, and you might realize that fact has been a sore spot for many investors.

This spin-off eliminates that problem. All of those important patents will be transferred to Spinco. Any cross-licensing will be negotiated with Spinco, not Qualcomm, which will be a completely separate and independent company. Qualcomm will still recieve all royalties yet the economic value of those royalties won't be diluted by having to trade away technology in cross-licensing deals.

After the spin-off is completed, will Qualcomm and Spinco have a relationship?

Yes, an important one. Even though Spinco will be selling CDMA-based products, Spinco will not be paying Qualcomm any licensing fees for use of CDMA-based technology not transferred to the Spinco. In return for that priviledge, Qualcomm will have free access to all future Spinco patents.

What does this mean for Qualcomm customers?

There will be board-level discussions in Europe about this spin-off. The cost to market CDMA-based products for companies such as Nokia that have not already signed 3G licenses with Qualcomm just got higher. They won't pay Qualcomm any more money than in the past, but those customers will still have to sign 3G licenses with Qualcomm before they can buy CDMA-based technology from anyone in the world. (That's always been the case.) But in the case of W-CDMA-based products, those customers just lost their negotiating leverage with Qualcomm regarding cross-licensing issues because they will have to negotiate all cross-licensing agreements with a separate company, Spinco.

For all existing license agreements, customers remain unaffected by the spin-off.

What will the two companies' positions be in their respective markets?

By virtue of the patent portfolio and the royalties recieved for the patents, Qualcomm remains the Gorilla of CDMA-based wireless transmission including HDR which is an interim data product that will help speed up adoption of CDMA2000. Spinco becomes the instantaneous Gorilla of software solutions embedded in the chip sets and integrated circuit boards. Depending on how you view the patents needed to manufacture CDMA-based chips and boards, Spinco in the least is a powerful King and at best is the Gorilla.
In a nutshell, this is absolutely terrific for the companies and their investors. Speaking of the investors ...

How will Qualcomm investors be affected by the spin-off?

First and foremost, Qualcomm investors will own shares in both companies because of the tax-free distribution of Spinco stock about one year from now.

Beyond that, because both companies will be Gorillas in their respective roles of getting CDMA to market, the two companies operating independently will be stronger than when operating as a combined unit as in the past. That in my opinion will ultimately bode well for the investors.

My recommendation is that Qualcomm investors hold their Spinco shares as long as they keep Qualcomm shares for the simple reason that Gorilla Gamers never sell a Gorilla until a new discontinuous innovation is a proven threat. There's no such threat, much less a proven one, in sight.

How does the market view this news?

Just as the market doesn't really understand the power of Qualcomm, it also doesn't understand the power that will be unleashed in this spin-off. That's why the stock only rose 7% on the day the spin-off was announced.

However, everything I've read in the press only has good things to say about it. Especially in light of the hugely negative press Qualcomm has been getting, this is not unimportant when gauging investor sentiment.

Probably the best anecdotal evidence about that has to do with a "buy" recommendation issued after the conference call about the spin-off. It was issued by none other than a guy named Snyder who follows Qualcomm for Hambrecht & Quist, one of the leading if not the leading high-tech investment bankers. To the best of my knowledge, Snyder and H&Q have always been very down on Qualcomm. In fact, Snyder's negative comments in the past have been reasons for major sell-offs in Q's stock. I believe this is the first time they've entered a "buy" recommendation for the Q.

--Mike Buckley

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