The Investor's Business Angle

April 16, 2018

One Takeover Bid Qualcomm Management Won't Be Able to Defend Against

Qualcomm management has unknowingly invited outside takeover interests because of continued contention with its patent licensees. It's up to management to thwart any future takeover attempts with a real plan to quiet down its licensing disputes. For example, taking better care of the licensing business through outsourcing or a spin-off of the division could potentially squash all takeover arguments.

Until then, shareholders are likely to vote for takeover proposals that will give them a higher valuation than what management can deliver under its current less-optimal licensing situation. The only defense Qualcomm management had against the earlier Broadcom bid was the help from the Trump administration expressing national security concerns about the proposed takeover.

But in a domestic takeover attempt, this same line of defense cannot be drawn, and management can be very vulnerable absent any improvements in its licensing business.This would be especially true if the takeover interest comes from Mr. Paul Jacobs, who is reportedly contemplating on taking back the company co-founded by his father.

Setting aside potential financing challenge, nothing else could really stand in the way of the former chairman's attempt to oust current management and get back control of Qualcomm.

While Qualcomm's defenders may argue in any other case whether an acquirer can just come in and take over the company's massive wireless technologies and patents, that argument collapses when dealing with a founding family.

In any case, Qualcomm investors are totally hedged against both the current less satisfying business and the constant takeover talks. Either management is forced to devise a creative solution to solve its licensing problems, or someone else takes advantage of Qualcomm's problematic licensing situation and acquires the company, both of which would deliver better returns for shareholders.

One of those two things must happen. It's a contest between management and someone trying to buy it out, something that should be welcomed by potential and existing Qualcomm investors alike.

March 11, 2018

Qualcomm: Rethinking Licensing Business to Prevent Future Takeover Attempts

Despite being the bigger money maker for Qualcomm, the licensing business has become a distraction for the company with all the ongoing litigations. No wonder investors would like a change for the better.

Issues with its licensing business has unwillingly invited the takeover bid by Broadcom. A company not quite as big as Qualcomm in terms of both assets and shareholders' equity, Broadcom nevertheless thinks it can do better than the current Qualcomm management.

Even if you don't like Broadcom just coming in and taking ownership of Qualcomm's dominant cellular technologies, you can't blame Broadcom for doing so when the Qualcomm management has mishandled the company's licensing business.

However, that can all change if Qualcomm understands the underlying problem and has the right solution to it. In short, Eliminating the vulnerability in its licensing business will insure Qualcomm's continued independence.

Here is how: separate the licensing business of administering licenses to licensees from chip-making and R&D. Potential considerations include outsourcing the licensing work to third-party legal entities or spinning off the licensing business to shareholders.

Either way, Qualcomm should stay out of any direct fights with problematic licensees to ensure favorable valuation of Qualcomm's remaining chip-making and R&D business. That'll make investors happy, and management in turn gets to retain its job.

By restructuring its licensing business, Qualcomm cuts off a main incentive for any other future takeover attempts. An independent Qualcomm holds better promises in developing future digital communication technologies.

August 14, 2015

Apple Can Sustain Device Sales Growth with Its Own Streaming Services

Summary

Apple is facing a slowdown in its device sales, but the solution may lie in its new and future streaming services.
Apple may have already shifted its priority from device innovations to streaming services that when well-adopted like its iPhone, can boost sales of its existing devices.
With its own device platform for streaming, Apple will have a competitive advantage over streaming service providers that don't have their own device platforms, such as Spotify and Netflix.

Apple's (NASDAQ:AAPL) revenue has come in lower for two consecutive quarters because of recent slowdown in its iPhone sales. Apple Watch, its newest product, is not generating nearly the amount of consumer enthusiasm as the iPhone once did. Considering the increased difficulty to develop another killer device like the iPhone, is Apple stuck with declining device sales going forward? Potentially yes, if all that Apple focuses on is trying to replace its own iPhone with something else. The answer would be likely no, however, if Apple could find a way to foster sales of its existing devices through services like digital streaming to take full advantage of the Apple ecosystem.

Apple will no doubt continue with device innovations. But as digital consumption takes stronger hold with each generation of new devices, Apple can't afford to let others be the sole providers of digital services, most noticeably music and video streaming. Such service markets are directly tied to device uses and can further boost the device market with expanded services.

Selling devices without offering relevant services not only gives up on shares in the service market, but may also lose a portion of one's own device market. There would then be a double loss effect. Future challenges for Apple may be not so much about coming up with new devices, but a lot to do with getting more involved in providing digital services on its existing devices.

Apple's acquisition of Beats Electronics and the subsequent launch of Apple Music have received relatively less attention, compared to coverage of past iPhone introductions. It may have appeared to some that spending $3 billion for Beats, a headphone maker with an obscure music streaming service, Apple was not showing proper regard for shareholders' money.

The market also seemed lacking a positive view on Apple's new, music-streaming service, having traded the stock down to below its 200-day moving average in less than a month, as earnings reports showed dismal device sales. Few seem to be making the connection between Apple's device sales and its emerging streaming services.

Although Apple is late to the music-streaming business, it can still get up to speed by leveraging its iPhone's popularity, similar to the iTune's success in music downloads that were initially tied to its iPod. With little notice from the public, Apple may have shifted its priority to reclaiming the lead in the digital music market and likely later, competing in digital video distribution as well.

Both streaming services require a device platform, and Apple has its own, the iPhone and iPad. Given that Spotify and Netflix (NASDAQ:NFLX), leaders in their respective markets, don't have such a platform of their own, there can be rooms for Apple to play out its strengths against rivals' weaknesses. Having one's own device platform can be a x-factor to help fine tune a service to outplay those that lack one.

Apple may try to offer two streaming versions for its services: one for its own platform of iPhone and iPad, and the other for other device platforms. The Apple-platform version would have full streaming features, while the non-Apple version would provide only limited functions. This way, Apple could try to sign up as many streaming subscribers as possible from non-Apple device users.

Meanwhile, its premium streaming services, available only on Apple's own device platform, could be used to persuade users of other devices, for example, die-hard music fans, to switch to an Apple device. This would ultimately lead to increased device sales for Apple. Such a switch has already been made easy with the move-to-iOS app, aimed at quickly transferring data to iOS from other systems.

Apple could also make it more difficult for competitors' streaming services to operate on its platform, such as those from Spotify and Netflix, as long as it's not considered anti-competition. Depending on how rules governing future streaming services may shake up differently, Apple might even exclude others' streaming apps from its platform, reducing user exposure of competing services.

This would not necessarily reduce Apple's device sales even though it may appear to be the case. Streaming is not the only use for a device owner and it's not likely that someone would abandon an Apple device altogether upon the exclusion of a competitor's streaming service. The user would have to either get another device for which the competing streaming service is available, or simply sign up with Apple's streaming service.

Apple has much to gain from the burgeoning streaming markets by leveraging the wide uses of its existing devices. Offering streaming services will give Apple its rightful share in the streaming markets where it should be a natural participant. Moreover, the more attractive and accessible Apple's streaming services become, the more Apple can sell its devices.