Qualcomm CEO in the ring alone after U.S.-China spat
kills deals
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[July 27, 2018]
By Stephen Nellis and Liana B. Baker
(Reuters) - Qualcomm Inc <QCOM.O> Chief
Executive Officer Steven Mollenkopf sought government help to block an
acquisition of the U.S. chip maker on fears of China's technological
ascendance, only to see his biggest deal thwarted by China.
Now the 49-year-old former electrical engineer is under investor
pressure to show that he can go it alone.
Several Qualcomm shareholders interviewed by Reuters said they were
willing to give Mollenkopf, who has been CEO since March 2014, only one
to two more years to show he can diversify the company's business beyond
the fiercely competitive mobile phone sector that now accounts for the
vast majority of its business and settle disputes with Apple Inc <AAPL.O>
and Huawei Technologies Co Ltd.
"Mollenkopf is in the 'show me' phase of his tenure. I think he has
about two years," said Tom Plumb, founder of Wisconsin Capital
Management, which has 2 percent of its equity portfolio allocated to
Qualcomm.
Mollenkopf faces the consequences of a bold gambit. Earlier this year,
Qualcomm asked the Committee on Foreign Investment in the United States
(CFIUS), which scrutinizes deals for potential national security risks,
to review a $121 billion hostile bid for Qualcomm by rival Broadcom Ltd
<AVGO.O>.
It was an unusual move, because typically only agreed deals are
submitted for CFIUS review. If CFIUS took this up, it would be the U.S.
government, not Qualcomm shareholders, that would decide its fate.
Qualcomm's maneuver worked. President Donald Trump blocked the deal in
March, citing CFIUS's concerns over a shift to Chinese dominance in 5G
wireless technology, even though Broadcom, which at the time was based
in Singapore, was not a Chinese company.
Amid growing tensions with the United States over trade disputes, China
responded by stalling on its antitrust review of Qualcomm's $44 billion
acquisition of NXP Semiconductors NV <NXPI.O>, which the two companies
had agreed in October 2016.
On Thursday, frustrated with Chinese regulators' seemingly endless
delays, Qualcomm let the merger agreement with NXP expire and paid it a
$2 billion breakup fee. NXP's whose strength in the automotive market
had been expected to help Qualcomm reduce its dependence on the
smartphone market.
Qualcomm now faces an uphill struggle in carrying out a transformative
acquisition such as NXP in the near term, given that all major
semiconductor peers have a footprint in China that would subject any
acquisition to a China review.
Mollenkopf has acknowledged this, but told analysts on Wednesday that he
believed big acquisitions would be possible again after this "unusual
window" of trade tensions between the United States and China passed.
Without NXP, Mollenkopf will have to find ways to expand Qualcomm's chip
offerings on its own into sectors such as automobiles, internet
connectivity and network processing on its own, investors say.
"Qualcomm has a lot to prove and the markets are not giving it the
benefit of the doubt," said Neuberger Berman associate portfolio manager
Shawn Trudeau. Neuberger Berman's equity income fund <NBHAX.O> owns $10
million in Qualcomm stock and has been an investor in the company for
close to three years.
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Steven Mollenkopf, CEO of Qualcomm, attends the Wall Street Journal
Digital conference in Laguna Beach, California, U.S. October 17,
2017. REUTERS/Mike Blake/File Photo
A Qualcomm spokeswoman said the company's earnings demonstrated "that the
execution of the company has been very strong in a period of great distraction"
and that it had received positive feedback from investors from its standalone
plan.
Mollenkopf has already faced questions internally about his leadership. In
March, his predecessor, Paul Jacobs, stepped down from Qualcomm's board of
directors to pursue a long-shot acquisition bid for Qualcomm, which has a market
capitalization of $93 billion. His exit followed disagreements with Mollenkopf
over his strategy, sources said at the time. Jacobs has yet to secure the funds
to put together that offer.
Later in March, investor frustration spilled over into Qualcomm's annual
shareholder meeting, when Mollenkopf was re-elected to the company's board with
only 45 percent of the shares outstanding. Shareholder advisory firms such as
Egan-Jones Proxy Services said that anything less than 80 to 90 percent of the
vote would undermine the authority of Mollenkopf and other board directors.
Mollenkopf got a partial reprieve on Thursday, when Qualcomm shares closed up 7
percent, at $63.58, as investors cheered the $30 billion share buyback Qualcomm
announced to make up for the loss of the NXP deal and celebrated the end of
uncertainty over the NXP deal.
However, Qualcomm's stock is still below the roughly $76.00 level it was
hovering at when Mollenkopf became CEO about 4-1-2/ years ago, and way below the
$82-per-share offer from Broadcom that it rejected in February. Hal Eddins,
chief economist at Qualcomm shareholder Capital Investment Counsel, said this
puts Mollenkopf under new pressure to improve performance.
"We obviously got caught up in something that was above us, so I don't know if I
would conclude anything about our own business, our ability to invest [in China]
or partner with Chinese companies," Mollenkopf told Reuters on Wednesday.
SETTLING WITH APPLE
Mollenkopf's immediate challenge is meeting Qualcomm's goal for up to $7.50 in
adjusted earnings per share by fiscal 2019, compared with $4.28 in fiscal 2017.
That hinges on resolving its licensing disputes with Huawei and Apple, as well
as continuing to diversify revenue.
Parts of Qualcomm's global court battle with Apple are expected to come to a
head in the fall and early next year, while Qualcomm and Huawei remain in talks
to try to resolve their dispute.
Only 13.4 percent of Qualcomm's $22.3 billion in revenue in fiscal 2017 was not
tied to mobile phones. This year, Mollenkopf expects Qualcomm's non-mobile
revenue to hit $5 billion, or about 22 percent of the $22 billion in overall
revenue at the low end of the company's guidance.
Mollenkopf "is on the clock for sure, and I'm not certain that the NXP buy would
have changed that," Eddins said.
(Reporting by Stephen Nellis in San Francisco and Liana B. Baker in New York;
Editing by Greg Roumeliotis and Leslie Adler)
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