Could Qualcomm be China’s next target?
The two main indicators that put Qualcomm in the frame for Chinese investment are:
the fact that Qualcomm’s financial results have taken a nose-dive recently (see Smartphone slide proceeds, says Qualcomm and Qualcomm to cut 15% of staff, could be broken up).
and:
the fact that China’s government-controlled semiconductor investment vehicle Tsinghua Unigroup says it has $47 billion that will be mainly spent in the United States (see Report: China has $47bn chip fund focused on US M&A).
Being the original developer of CDMA cellular communications protocol and holder of a commanding set of essential patents helped propel Qualcomm to become a leading semiconductor company and it still is. But its dependence on the fast-moving consumer markets also makes its fragile. Some observers think that smartphones and tablet computers are rapidly joining personal computers as former drivers of the semiconductor industry.
Qualcomm was ranked number three in the 2014 calendar year ranking of semiconductor suppliers by IHS with annual chip sales of $19.3 billion. A long way behind market leaders Intel and Samsung but ahead of other potential China targets, memory makers SK Hynix and Micron Technology.
To recap on Qualcomm’s most recent results the company reported revenues of $5.5 billion in its last fiscal quarter (ended September 27, 2015) down 18% from the same quarter a year before. For its fiscal year, Qualcomm reported $25.3 billion in fiscal year sales, down 5% from the prior year and $5.3 billion in profits down 34%.
Of course this is not conclusive but there are several additional indicators.
1) One is that Tsinghua Unigroup has previously expressed interest in discussing a merger deal between two Chinese companies it controls – Spreadtrum Communications and RDA Microelectronics – and MediaTek.
However, as Taiwan law prohibits Chinese investment in chip "design" firms, Tsinghua’s Zhao has said that Tsinghua’s $47 billion fund will likely be spent on investment on firms in the United States. If MediaTek is a suitable target that is presently unavailable then why not pursue Qualcomm?
2) Chairman Zhao let slip in his interview with Reuters that Tsinghua is already in talks with a major U.S. chip company but that would likely not involve a majority stake due to U.S. sensitivity.
A major US chip company with a significant Chinese minority stake would change the industry landscape and reduce China’s economic deficit when it comes to its semiconductor balance of trade.
For sure, that company could be Micron Technology Inc. – to help China establish a leading position in NAND flash memory manufacturing – but it could also be Qualcomm? And Micron management has already ruled out a Tsinghua takeover of its company.
3) China is already very familiar with Qualcomm having been part of the storm that has halted the company’s previously meteoric progress.
China’s National Development and Reform Commission (NDRC) called the investigation spent two years undertaking an "antitrust investigation" that resulted in $975 million fine and a significant royalty rate cut (about one-third off) for Chinese handset vendors (see China deal squeezes royalty cuts from Qualcomm).
4) The founding Jacobs family is becoming more distant from Qualcomm. This is more of a cultural observation than a hard indicator but nonetheless one that I think can be taken seriously even if it is hard to assess.
Qualcomm was founded in 1985 by Professor Irwin Jacobs, Andrew Viterbi and others. Jacobs served as CEO and chairman for many years before stepping down in favour of his son Paul Jacobs in 2009. Paul Jacobs served as CEO from July 2005 to March 2014 and continues in the position of executive chairman.
But it might be possible to infer that Qualcomm has enjoyed the story arc from small-time experimenter in academic communications protocols to driver and beneficiary of an explosion in personal mobile cellular communication and 30 years on from its formation it would be time to do a deal that would be part of a new order in consolidation, globalization and Chinese significance.
But probably only a minority deal!
Related links and articles:
News articles:
China’s Tsinghua interested in MediaTek
Smartphone slide proceeds, says Qualcomm
Qualcomm to cut 15% of staff, could be broken up
Report: China has $47bn chip fund focused on US M&A
Qualcomm increases share of smartphone processor market
China deal squeezes royalty cuts from Qualcomm
Does a Chinese bid for GloFo make sense?
If you enjoyed this article, you will like the following ones: don't miss them by subscribing to :
