Qualcomm to Spin Off Core Chip Business

Qualcomm Inc. said Tuesday it will spin off its core wireless chip and systems software business to smooth the way for the unit to build phone chips that will work on multiple technologies, including a rival system widely used in Europe.

The move ultimately is intended to simplify relations with the chip unit’s customers and result in higher sales. The news was cheered by investors, who bid up the San Diego company’s battered shares by 7%, or $4.75, to $68.38, in Nasdaq trading Tuesday.

The operations to be spun off will focus on selling chips and software used in mobile phones and will have 1,000 engineers and more than $1 billion in annual sales, said Qualcomm Chairman Irwin Jacobs. Qualcomm will keep patent and royalty revenue, plus several wireless communications businesses and the Eudora e-mail software business. Those operations will have about 800 engineers and a little less than $1 billion in yearly sales.

“These will both be very substantial companies,” Jacobs said. “The intent of Qualcomm from the very beginning of the company has been to innovate and generate new technology, bring it to the market.”

Industry analysts said the spinoff plan will benefit both Qualcomm and its chip business in the long run.

“I view this as a smart move and something they had to do,” said Mark McKechnie, an industry analyst at Banc of America Securities.

The roots of the plan are tied to the future of the telecommunications business.

In the coming years, phones will need to operate over a patchwork of different kinds of wireless networks. That means the companies selling phone chips will have to integrate several separate technologies into one neat package.

Qualcomm has a leading position in a technology called code division multiple access, or CDMA.

But it must negotiate deals with other firms to gain access to competing technologies, such as Europe’s widely used global system for mobile communications (GSM).

In turn, the GSM chip makers need a deal with Qualcomm to use the company’s patented CDMA technologies.

The necessary cross-licensing deals have been slow going for Qualcomm’s chip unit, analysts said, largely because the deals are inherently lopsided, with Qualcomm getting more royalties than it pays out to GSM patent-holders.

The situation has triggered a sort of licensing brinkmanship, where some GSM manufacturers have delayed licensing their technology to Qualcomm’s chip unit to press for a better price for a CDMA license.

Spinning off the chip business will insulate the unit from the sometimes-tricky royalty negotiations, because the majority of the patents and their resulting royalty revenue will remain part of Qualcomm.

“This allows each [Qualcomm and the spinoff] to focus on what they do best. And for both companies, it unencumbers negotiations with potential licensees,” said Brian Modoff, an analyst at Deutsche Bank Alex. Brown.

Under the plan, Qualcomm initially will sell less than 10% of the wireless chip company--temporarily named Spinco--to the public. Qualcomm would then distribute the remaining shares in Spinco to its shareholders, making the unit a completely separate operation by August 2001.

For Qualcomm, the spinoff plan is the latest in a string of major restructuring moves.

In the last few years, Qualcomm has sold off its phone-making unit and its wireless network equipment business, spun off wireless license assets into publicly traded Leap Wireless and contributed assets and employees to create a joint venture with Microsoft Corp. called WirelessKnowledge.

Amid all the activity, Qualcomm’s shares soared to stunning heights, hitting a 52-week high of $200 in January.

Since then, however, dampened prospects in China and a blow to CDMA phone sales in South Korea have taken huge chunks out of the stock price. Despite Tuesday’s run-up, Qualcomm shares are off 61% for the year.

Jacobs said the spinoff was not an attempt to rekindle investor enthusiasm for the company’s stock.

“This has been in the works for some time, so it’s not a quick fix to any sudden problem,” he said. “We view it as a very good long-term strategy for Qualcomm and for Spinco.”