Qualcomm has survived many legal challenges to its patent-driven business model. The suit filed by Apple is a tougher test.
Investors took note, wiping $13 billion off of Qualcomm’s market value since news of the suit hit late Friday. One reason is Apple represents about one-quarter of Qualcomm’s licensing revenue, estimates Christopher Caso of CLSA. It is a formidable foe with $132 billion in net cash.
More importantly, the Apple suit hits Qualcomm at a terrible time: Qualcomm is already in the thick of it with regulators in Korea, Europe and the U.S.—all of whom are examining the company’s business practices regarding the deep well of patents that go to the heart of most wireless devices operating today. Licenses from these patents generate about 80% of the company’s pretax profit.
Qualcomm is also trying to get regulators to sign off on its $39 billion acquisition of NXP Semiconductors . This is the company’s biggest M&A deal to date, as it will add much needed diversity to a business that still relies heavily on the slowing smartphone market.
The lawsuit makes clear that Apple has been discussing Qualcomm with those agencies, many of whom have to sign off on the NXP acquisition for it to proceed. Qualcomm was expecting to complete the deal by the end of this year, but the fact that its stock has now slid back below its price from before the deal was announced suggests that shareholders now see a strong risk of a delay.
That—plus the prospect of having to lower its royalty rates for a key customer—have placed another cloud of uncertainty over Qualcomm. The company’s future depends on passing this test.