I had an odd conversation recently. Speaking to a friend at Qualcomm, he said that the management team there was really worried about Jana Partners’ activist attack on the company.
That did not make sense to me. I just could not see them getting too worried by something like this. But then I heard identical comments from several other people. And so now I am starting to believe that there is actually a bit a trepidation on Morehouse Drive.
I say this is strange because Qualcomm has become such a massive company, so powerful in its industry, that it should be able to fend off any activist. After all, activist strategies mostly boil down to massive head games played out in the press and in the markets. If you are nervous when you start the fight, then you are already psychologically defeated.
As I mentioned in my last post, I have some familiarity with shareholder activism from both the investor side and from the company side. I am no expert, but I have a decent sense of the strategies used to mount an activist attack and to defend against one. (I assign no moral judgment to either side.)
So it strikes me as odd that Qualcomm should be worried. They have so many factors working in their favors and levers to pull, that fending off an activist should not prove too difficult. Or at least, it should not keep anyone up at night. Moreover, Qualcomm is known as a company with a very high level of self-confidence (usually described by its competitors with a less flattering word). That trait seems to have deserted them as they go up against Jana.
Some of this concern may just come from the surprise factor. Qualcomm should have seen this coming, but they are not the first company to underestimate the scope of activists.
However, I think that some of their concern also stems from the fact that Qualcomm is starting to show some vulnerabilities. As I mentioned in my previous post, the company is now mature enough and large enough that built-in flaws have become apparent. All companies have these, Qualcomm is big enough that they are more readily visible to outside observers.
For instance, they have a problem with their margin structure. They are not earning as much as they should. In fact, part of Jana’s ‘advice’ is that the company undergo a big cost reduction. Finding those costs is not easy, but if you ask anyone who works there (and I have asked many), it is clear that there is ample cost to cut. And these costs can be cut without jeopardizing the overall business.
I will not get into all the details here (happy to discuss offline), but there are pretty clear ways to reduce costs at the company. Moreover, I would argue it is in the company’s best interests to do this. They would benefit from a bit more focus, discipline and energy.
And this leads back to why I do not understand management’s fear about dealing with an activist. Ultimately, everyone has the same goal – get the stock price up. Successful activist defenses basically boil down to nullifying the activists’ arguments by co-opting their strategies. In Qualcomm’s case, they do not need to adopt all of them. Certainly splitting up QCT and QTL is a mistake. But increasing their buyback and raising the dividend, those are not such bad ideas. The company’s long-term health would also be improved by taking the cost reduction steps necessary to make those financial strategies possible.
If I were advising either side of this battle, it would be to focus on cost and incentives throughout the organization.