Interdigital Series - Part 7

Sunday, January 13, 2008

Will Qualcomm acquire Interdigital? This was the question I raised in my last article. I will try to take a quick look at the feasibility of such an event in this part of my series.

Interdigital has a market cap of about $1 billion today. The stock closed on Thursday, January 10 at $21.47, which is relatively low when compared to its 52-week high of $35.74. If my iPhone speculations are true, I anticipate that the company’s stock will climb back to these numbers when the iPhone V2 is out later this year. The strengths of this number include its per-unit royalty from its Infineon alliance and the ASIC business. The risks include the sustenance of the ASIC business and the litigations. I also think that if this deal were a reality, Qualcomm may have to cough up between $35 and $45 a share amounting to a deal worth $1.75-$2.25 billion.

The numbers certainly look staggering, but perhaps not for Qualcomm. The company closed on January 10th at $37.99 with a market cap of about $62 billion. Interestingly as of Sept 30th 2007, Qualcomm had cash and equivalents of $2.4 billion and short-term investments of another $4.17 billion. So, the San Diego-based company can certainly afford a big acquisition. The question is why should it acquire Interdigital and will it do so?

Why should it Acquire? Let me try and bring out the financial impact to Qualcomm here. Interdigital traditionally licenses its IP for a flat-fee. On the other hand, Qualcomm charges per-unit handset royalty as a percentage of its average selling price (ASP). The exact proportion of the ASP that Qualcomm will receive is the center its ongoing battle with Nokia. If Qualcomm acquires Interdigital before any such deal is finalized, it will get an upper hand in the discussions. A 1% higher licensing rate from Nokia is worth about $2.4 billion to Qualcomm. This figure, even when discounted at 8%, is worth about $1.9 billion. 1% may be on the higher end of a gain from IDCC’s IP portfolio to Qualcomm. But I have used these numbers to illustrate the higher worth these patents could be to the licensing model of Qualcomm than to IDCC itself. If Qualcomm is certain that the acquisition can guarantee such ballpark numbers from Nokia alone, the decision then will almost be a no-brainer.

Will it acquire? I am sure it will if it needs to. For one, Qualcomm has, in the past, never hesitated to make big acquisitions. Its 2000 acquisition of SnapTrack for its GPS capabilities is a good example. The company paid $1 billion in stocks to the San Jose-based SnapTrack for close to 50 essential GPS patents and its engineering team. Similarly, it paid a comparable amount to acquire Flarion in 2005 for the OFDMA patents and the team. While Interdigital does not bring in new technological capabilities like the other two did, the King of Prussia-based company certainly has the complementary IP portfolio that Qualcomm would love to have. Besides, with its recent spree of acquisitions, Qualcomm has sent a clear signal that it wants to expand and strengthen its leadership position. So money will certainly not be an issue if Qualcomm determines that Interdigital adds value to its profile.

It is true that my excitement about Interdigital is very speculative, especially with respect to its iPhone involvement. But that will only affect its valuation and hence the price for an acquisition. However, I am certainly confident that the synergies from this acquisition, if it happens, can cement Qualcomm’s future while stabilizing its current position.

Posted by Vijay Nagarajan at 9:00 PM  

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