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Proposal to split up Qualcomm is patently absurd

Activist investor Jana Partners’ proposed Qualcomm breakup reveals that Jana knows finance but not engineering.

Splitting up Qualcomm Jana Partners
Credit: Image credit: flickr/jontintinjordan

The proposed breakup of Qualcomm by activist investment firm Jana Partners, as reported by the Wall Street Journal this week, would be a blunder of biblical proportions. The equivalent of Delilah cutting off Samson's hair while he slept, dividing Qualcomm into separately traded semiconductor and technology licensing businesses would produce two companies of lesser value than the former whole.

Qualcomm builds semiconductors because of the company's history in licensing the intellectual property from mobile telecom and radio research and design. In turn, the patents from this research and design create a synergy that accelerates the design and fabrication of new semiconductors without infringing on other companies' patents. For instance, the Qualcomm Snapdragon system on a chip (SoC) that powers the majority of smartphones is the product of Qualcomm's understanding of the needs of smartphone designers and skill in integrating radio technologies with digital processors. The Samson-like strength of its engineering team brought about the integration of 32- and 64-bit microprocessors and high-speed LTE radios on a single chip, reducing the cost of SoCs and shortening smartphone makers' time to market. Hyper-smart, hyper-aggressive, and wealthy Intel has yet to meld communications chips from its Infinion acquisition and Atom microprocessors into one chip, though this has been on its roadmap for at least three years.

What is clear is that if Qualcomm is broken up, in the future the company will struggle to beat competitors like Intel by reproducing another feat of engineering like the Qualcomm Snapdragon SoC. Jana Partners' proposal is reminiscent of the anecdote about Google's Larry Page, as former Google HR chief Jonathan Rosenberg told Kahn Academy founder Salman Khan. After reviewing a product plan presentation written by a recent MBA without technical credentials, Page recommended the MBA go "sit with the engineers" because the MBA approach to building things was stupid.

Qualcomm has had a couple of setbacks. It lost the SoC competition for Samsung's S6 to Samsung's Exynos SoC. The company is also encountering competition mainly on price in Asia from MediaTek. But the large mobile SoC market stands to grow even larger with the merging of ultrabooks, tablets, and smartphone designs. Apple built the latest MacBook on an Intel mobile SoC, indicative of the convergence of software and hardware design and manufacturing into a single mobile category. When the Internet of Things (IoT) of 50 Billion connected devices arrives, Qualcomm stands to reap rewards from its skill and patents in integrating microprocessors and radios and managing chaotic radio signals of these devices with networks, something that is really hard to do.

Similar divisions at HP and eBay, which were mentioned in the Wall Street Journal report, are completely unrelated to Jana Partners' proposal for dividing Qualcomm. HP is spinning off the PC business because no one wants it, and there is little synergy with the company's main line businesses – professional services and servers. Splitting eBay and PayPal makes sense because eBay has many payment service alternatives, so the loss of PayPal won't affect its business like the loss of Qualcomm's licensing business would affect the company's semiconductor business, or vise versa. Independent financial reporting by PayPal will enhance its stock price given the high public equity investor expectations created by more than a decade of VC investment in payment ventures such as Square, Braintree Payments, and Stripe.

Finally, the comparison of splitting Qualcomm to Jana Partners' profitable split of food brand and food processor Conagra, also mentioned by the Journal, is also irrelevant, except that both are the ideas of activist investor Jana Partners LLC. The suggestion that the management of old-line food processor ConAgra has anything in common with the management of Qualcomm is patently absurd.

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