Q apitulation

Qualcomm had some big news after the close, announcing that they were enacting a massive corporate restructuring. This included a huge reduction in workforce and other cost-cutting measures, as well as promises to buy back more shares and increase their dividend, and even potentially to split the company in two. They are rotating out three board members and only adding one back, thus shrinking the board. Big changes.  
This is all in response to Jana Partner’s activist campaign against the company launched back in May. Jana actually got to pick the two incoming board members.

This is capitulation with a Capital Q.

And as far as we the public know, Jana did all that with a letter. 

I first wrote about this when Jana launched their campaign, and in that post I said the best way to defend against an activist is to give them most of their demands without actually ceding too much power. Giving away a fifth of your board seats definitely fails that test.

The company also announced some pretty messy results as well. During the conference call, management spent most of their prepared remarks talking about the restructuring rather than the results. They mentioned cost reductions about 137 times by my count in their comments. Going back to my earlier post, they certainly have a lot of things they need to cut. When companies get as big as Qualcomm is, there are always lots of inefficiencies.

So a generous interpretation of today’s news is that the management team realized now would be a good time to  change the culture and fix the cost structure. They have tried before, but now they can use the outside influence as an extra tool to leverage change.

That is the generous interpretation, because it is hard to think of another reason why the company would give in so much, so quickly.

As I mentioned, I think the cost reductions are overdue, but are going to be hard to do in a sensible manner, in the timeframe discussed. And the reduction in non-core businesses makes a lot of sense (MediaFlo, Mirasol….). What troubles me more is that the company appears to be seriously considering splitting in two. For a variety of reasons, I think this is a bad idea. However, the company is now saying they are considering that possibility. Of course, ‘considering’ something does not mean that it will happen, but it sounded like they were actually setting up a special committee of independent board members to make that call.

The whole thing leaves me a bit confused, and I suspect I am not alone. Conceding to activists normally boosts the stock price, but Qualcomm shares are unchanged since Jana went public with their campaign, and were trading basically flat after hours (not the best indicator). On one hand, Qualcomm is doing a bunch of things that will make the stock more attractive – buybacks, margin improvements, etc. On the other, many investors may read the speed with which they gave in as a signal that conditions are worse than outsiders believed. Certainly this quarter’s results did little to alter that outlook.  

My opinion is that the company’s core business engine – chips, technology and licenses – are still intact and strong. The company is just dealing with the fact that mobile growth is slowing with the law of large numbers. When you have Qualcomm’s market share, it is very hard to grow faster than the market. Still, I think it has a solid foundation, so that it just needs to fix its costs. Nothing they said today change my view on that, except for the fact that they are letting Jana push them around. Are things that bad? The title of my last note was “There is Nothing to Fear but Fear Itself” but I suspect that fear may have been enough.

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