Tuesday, March 29, 2011

Will Qualcomm lose billions on T-Mobile acquisition?

The proposed AT&T acquisition of T-Mobile raises serious antitrust issues, which have yet to be investigated by the FCC. (Of course, if the deal is blocked, T-Mobile’s long-term viability will be called into question.)

One casualty of the merger controversy could be Qualcomm’s expected windfall unloading the spectrum from its unsuccessful MediaFlo venture.

The FT reported Wednesday:
[T]he Washington-based Rural Cellular Association, which represents nearly 100 rural and regional telecommunications network operators in the US, told the Federal Communications Commission that it should delay AT&T’s proposed acquisition of the Qualcomm spectrum.

“AT&T is on a spectrum buying binge, including both this Qualcomm acquisition and the recent announcement that it will acquire T-Mobile,” said Steven Berry, the association’s chief executive.

“These actions are further proof that AT&T is doing everything possible to strengthen its already dominant position in the wireless industry at the expense of competition.”
I don’t know how seriously the criticism will be taken, but their logic is understandable: helping AT&T get more spectrum was less anti-competitive when taken separately rather in combination with buying their largest GSM rival.

The other implication, unfortunately, is that if AT&T can’t buy the spectrum, who will? If Verizon knows it’s the only serious bidder, it will try to buy it for 40¢ or 50¢ on the dollar.

I’m guessing independent network operator LightSquared could use the network to build a nationwide LTE footprint, and Qualcomm spinoff Leap Wireless (aka Cricket) would certainly be happy to have more spectrum for its LTE supplier.

However, I’m guessing LightSquared can’t go to its VCs and say “you got an extra $2 billion lying around anywhere?”

So if not sold to AT&T or Verzion, I suspect Qualcomm will need to sit on its spectrum or find some other use: the sub-10% market share carriers have less cash than it does to buy its valuable spectrum. Its balance sheet at the end of FY 2010 (Sept 26 2010) showed $18 billion in cash and cash equivalents.

Thursday, March 10, 2011

Paul's fifth anniversary

Both Xconomy and the U-T covered this week’s shareholder meeting. (I’m sorry I couldn’t make it, but it’s been harder to cover the meetings since I moved to Silicon Valley.)

Former U-T writer Bruce Bigelow focused on the five year anniversary of Paul Jacobs being promoted to CEO, while the U-T focused on the share price.

Alas for shareholders, the latter story is far less interesting. Now at $54, the stock has never tested its record $88 close at the end of 1999, at the end of the telecom bubble. While the stock has recovered wonderfully from its post-NASDAQ low of $13, for the past five years it has gone back and forth in a broad trading range of $30-60.
In that regard, it almost exactly mimics my Apple stock in the 1980s, when the correct strategy was to wait for the shares to double to $50, then dump them, and buy them back as they got closer to $25. (This strategy would have only worked twice in the last seven years with AAPL, with the dips of February 2008 and December 2008 legitimate buying opportunities.)

While 2010 provided record net income, sales have essentially been flat for the past three years. The stock price is highly dependent on the growth multiple, and the U-T quoted an analyst who’d downgraded the stock due to slowing growth.
So while the industry is continuing to expand its use of mobile data services — the driver of profitability for QCOM in this century — it’s not clear how much of that will accrue to the share price and its shareholders. The pressure on QCOM over the past few years has been the commoditization of even high-end handsets, pushing down wholesale prices and thus the basis for QCOM’s royalty payments.

As Bigelow recounts, Jacobs fis has a sound strategy for expanding Qualcomm’s influence and reach in the wireless industry, beyond cellphones and (with the Atheros purchase) beyond cellular to Wi-Fi and other forms of wireless communications. Still, it’s not clear whether these efforts will grow the company or merely replace shrinking revenues in existing business.

In this regard, Qualcomm is looking like any other mature tech company, like IBM, HP or Intel. A retailer or other low tech company can usually count on the same revenues year in, year out — but Moore’s Law tech companies must accepted that the old products will decline in price and thus must be replaced by upgraded or entirely new products.

Perhaps the world’s largest semiconductor company offers a ray of hope: Intel revenues were declining from 2007-2009 until things rebounded in 2010 with revenues up 24% and record earnings. According to its January earnings call, Intel benefitted from exposure to rapidly growing product categories and geographies. It remains to be seen whether Qualcomm’s diversification will bring it similar dividends in 2011.