Jeremy Steinberg
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Activist buys big stake in Qualcomm

Qualcomm Inc. is under pressure from activist investor Jana Partners LLC to consider a breakup and other options to boost the giant chip maker's sagging stock price.

Jana is asking Qualcomm to consider spinning off its chip unit from its patent-licensing business, which accounts for most of the company's profit, according to a quarterly letter to Jana investors reviewed by The Wall Street Journal. Qualcomm itself proposed the idea 15 years ago but later called it off.

Jana--which has purchased a stake of more than $2 billion, making it one of Qualcomm's largest shareholders--also is calling on the company to cut costs, accelerate stock buybacks and make changes to its executive-pay structure, financial reporting and board of directors, according to the New York hedge fund's letter, which was slated to be sent to Jana investors Monday.

"Qualcomm welcomes input from our investors and has a track record of active engagement with stockholders," a spokeswoman for the chip company. "The board and management team will continue to consider actions that are in the best interests of all stockholders."

Jana executives and Qualcomm's management have held private discussions since late last year, according to a person familiar with the conversations. In the letter, Jana described the talks as constructive.

Jana is one of the largest activist funds, with $11 billion in assets under management. It tends to work with management behind the scenes, as it did last year in gaining board seats at what is now Walgreens Boots Alliance Inc. Qualcomm, with a market capitalization of about $114 billion, is its largest target to date.

Breakups have been a popular theme in activist campaigns in lately. Last year activists pushed to split up eBay Inc., which is spinning off its PayPal unit, and EMC Corp., which so far has resisted a split. DuPont Co. has pushed back on an activist's call for the breakup of the chemical company.

Qualcomm, based in San Diego, is the world's largest maker of chips used in mobile phones. It also earns patent royalties for most smartphones sold since third-generation networks arrived in the past decade. About two-thirds of the company's profit comes from such royalties.

A highflier in the tech bubble--it was the best-performing stock in the S&P 500 index in 1999--Qualcomm's stock price is down 11% over the past year and the company's total returns to shareholders have lagged behind the tech-heavy Nasdaq 100 index over the past five years.

But the company's shares have outperformed those of many semiconductor peers. Qualcomm also has been more generous than most to shareholders, reporting $37 billion in dividends and share buybacks since 2003.

Still, competitive pressures are weighing on the company. Though it made the modems used in Apple Inc.'s latest iPhones, longtime customer Samsung Electronics Co. opted to use an internally developed processor for its new Galaxy S6 rather than Qualcomm's latest Snapdragon chip.

Its rivals have aggressively cut costs to win business in the Chinese smartphone market; though the company recently settled an antitrust investigation in that country, it continues to face antitrust probes in the U.S., Europe and South Korea.

Qualcomm has taken steps recently to boost its stock price, including a $15 billion stock buyback announced last month, with $10 billion set to be repurchased in the next 12 months.

In the letter, Jana said the buyback is a positive step but the company needs to do more to capitalize on its strong position in the chip market. The fund said Qualcomm's chip business is essentially worthless at the company's present market value.

Qualcomm executives have defended its current corporate structure. But they also have said they regularly evaluate whether it makes sense to keep the chip and patent-licensing businesses together.

Qualcomm Chief Executive Steve Mollenkopf last month said the company continues to believe that the businesses support each other in important ways.

In China, for instance, having both businesses helped the company in talks with government officials during the antitrust investigation, which it settled by agreeing to pay $1 billion in fines and modifying its royalty rates on handsets sold in the country.