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Qualcomm In A Lose-Lose Fight With Apple

Apple has hired away a baseband expert from Qualcomm, Esin Terzioglu. Baseband is the modem that allows for communications and uploads and downloads of data between a device and the internet.

Qualcomm and Apple (and even Apple suppliers) are locked in a legal dispute since the beginning of the year.

The bone of contention? Qualcomm's dominant position in making the baseband parts (modems) for communication chips. In addition to a counter-suit brought by Qualcomm against Apple, the former has also sued Apple's OEM partners like Foxconn for non-payment of royalties, alleging interference by Apple.

If Apple is able to come out with its own baseband technology with the help of Terzioglu, it could deal Qualcomm a bigger blow going forward. Qualcomm already had to lower guidance when it reported earnings for the March quarter several weeks ago as a result of the dispute between the two companies.

Apple has already developed and manufactures the "A" series microprocessor chips in-house, which powers most of its iOS-based devices like the iPhone. With an internally developed broadband chip, Apple will further lower costs for itself going forward, along with significantly reducing its dependence on Qualcomm.

As far as Qualcomm is concerned, the biggest favor they can do to themselves and their shareholders is to find a way to settle with Apple and, thus, with Apple's suppliers. At the end of the entire situation, Apple will have its own baseband technology and all Qualcomm will have to show for it is a huge legal bill that will come out of shareholders pockets, as everything usually does.

As an aside, it does look like Qualcomm will have to cough up more money to acquire NXPI after all is said and done. Qualcomm has tried its best to stall by extending the deadline for existing shareholders of NXP to tender their stock, but it looks like a higher price should be in the offing.

Yesterday, Elliott Management said that they urge NXP Semiconductors to renegotiate with Qualcomm to boost its current offer of $110 per share. Elliott Management is an activist investor.
This morning, Qualcomm has yet again extended their $110 per share offer until the June 28 close of business. Approximately 14.1% of NXPI shares have currently been tendered.

By not paying more for NXP Semiconductors and continuing in its lawsuit against Apple and its suppliers, all Qualcomm is achieving is delaying the inevitable and causing further erosion in its stock price, which is languishing at closer to its lows of the year.

After all is said and done, Qualcomm will more than likely end up paying more for NXP Semiconductor and also will more than likely end up in some sort of settlement with Apple and gang unless Apple beats Qualcomm to the game and comes up with its own baseband technology.

Either case, it's a lose-lose for Qualcomm and its shareholders.

(Long aapl, nxpi, long and short aapl options)

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