Qualcomm (QCOM) dropped a bomb just before earnings — or rather, the Wall Street Journal dropped it for them — with speculation over whether the company would splinter its operations. According to the WSJ report, QCOM “is expected to conduct a sweeping strategic review that will look at the possibility of a breakup, among other options.”
The cause? Shocker, another “activist investor” who wants to get paid.
On the whole, I am pretty ambivalent about so-called activist investors. Carl Icahn can feel free to duke it out with Bill Ackman on CNBC every weekday, for all I care, so long as at the end of the day the companies are making decisions based on the greater good of all investors and not just the one with media connections.
In fact, an article in The Economist this year posited that activist investors are one of the few tools we have to keep public companies accountable and honest … even if some may disagree with their tactics.
But all that said, I have to wonder why that drastic step would be right for QCOM stock — and most importantly, beneficial to Qualcomm stock holders.
No Qualcomm Breakup Plans … Yet
To be clear, Qualcomm hasn’t made any announcement yet — and nor should we suspect a sweeping overhaul to be revealed in this week’s earnings. In fact, reports indicate that investors may simply get a promise of more QCOM stock buybacks or greater dividends as a way to appease shareholders.
Dividends and buybacks are par for the course with aging tech giants, with both Microsoft (MSFT) and Cisco (CSCO) pushing hard in recent years to establish themselves as good stewards of shareholder value, and I expect Qualcomm to follow suit regardless of what happens.
After all, QCOM stock is down 12% year-to-date in 2015, and up just more than 30% since January 2011 while the broader Nasdaq index has roughly doubled.
Something needs to be done to right the ship and protect investors.
But the agitator in question — New York hedge fund Jana Partners, which invested $2 billion of its $11 billion total in Qualcomm back in April — wants more. Jana has talked about a new corporate board, cost-cutting across the board and even a breakup on top of the typical dividends and buybacks.
I think this is all really just posturing, and barring a disastrous earnings report, we shouldn’t expect the $100 billion mega-cap chipmaker to devolve into cost-cutting mayhem just yet. After all, it’s still the world’s largest maker of mobile phone chips and has many things of value beyond patents to be parceled off to the highest bidder.
In fact, QCOM revenue has been marching steadily higher for some time even if earnings haven’t been as impressive. After all, not all mobile phone companies can be Apple (AAPL) and enjoy rich margins. Remember, AAPL makes 92% of all smartphone profits in the world — that kind of dominance comes once in a generation, and cannot be expected of Qualcomm.
Other chipmakers have struggled with long-term underperformance too — including Broadcom (BRCM) and Intel (INTC). Though it’s worth noting BRCM stock started a nice run about a year ago on news it would unload some cellular assets to bolster its balance sheet and reward shareholders, and Intel continues to bang the drum on looming layoffs.
I expect QCOM stock will follow this script, cutting costs and distributing more cash to shareholders. Reports already say that Qualcomm is prepared to lay off more than 10% of its workforce. Not only does an all-out breakup seem premature, there are no guarantees that the moves will maximize value; after all, we are by many estimations in the midst of a tech bubble and overly inflated asset prices could deflate dramatically in the next year or so — so timing is everything for such a move.
Hedge fund overlords aren’t known for approaching situations with kid gloves, so it shouldn’t be a surprise that Qualcomm is getting the evil eye right out of the gate. But if Jana gets its board shakeup and a hefty dividend and stock buyback plan, it will likely be content to let sleeping dogs lie — particularly if it sees the profits it wants out of QCOM stock in the next several months.
But if not? Well, all’s fair in love and billion-dollar hedge fund investments.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP.
