Qualcomm Sells Handset Unit to Kyocera

The company also reaches a five-year deal to sell CDMA chips to the Japanese firm.
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Qualcomm

(QCOM) - Get Report

defied the Street's clamoring Wednesday with a decision to sell its handset business to

Kyocera

(KYO)

.

The deal marks a strategic gambit intended to sacrifice market share in the handset business for a shot at dominating the market for the chips inside wireless phones, analysts said. As part of the deal, Kyocera will buy the bulk of its CDMA, or code division multiple access, chips and system software from Qualcomm for five years for use in the phones.

Irwin Jacobs, Qualcomm chief executive, said the agreement aimed at increasing the demand for CDMA wireless technology. CDMA is one of three wireless phone standards.

The deal was announced after regular trading ended at 4 p.m. EST. But in after-hours trading, Qualcomm's shares fell 1 15/16 to 483 1/2 on the news, according to

Instinet

, after plunging 11 7/16, or 2%, in regular trading on concerns about the deal.

Kyocera's shares did not trade after hours, but they rose 15 3/16, or 10%, in regular trading to close at 166 3/8.

Qualcomm's competitors hardly reacted in after-hours trading: Ericsson

(ERICY)

fell 1/16 to 59 1/8, after slipping 5/16 in regular trading. Nokia

(NOK) - Get Report

shares gained 1/2 to 165 1/2, after falling 4 1/2 in regular trading. And Motorola

(MOT)

shares stayed at 141 3/4 after rising 3 1/4 during regular trading.

Many on Wall Street were expecting Qualcomm to sell its handheld phone business to one of those three companies.

All week, Wall Street had been waiting for a deal, but the announcement left some uncertainties.

Salomon Smith Barney

on Monday published a research report summarizing the expectations:

"Expect an announcement this week," wrote Salomon analyst Alex Cena, who rates the stock a strong buy. " If neither Motorola nor Nokia involved; viewed negative."

Financial terms of the deal were not disclosed. Qualcomm has agreed to sell its consumer phone business, phone inventory, manufacturing equipment and customer commitments. But Qualcomm made no announcement about its research and development group. Cena also discussed a potential sale of that business in his report.

Previously, that handset business comprised 43% of the San Diego company's revenue, while the chip business accounted for 26%. The balance was in satellite trucking logistics (9%), contract services (8%) and licensing and royalties (7%) and satellite phones (6%).

While the handset business comprised the bulk of revenues, Kyocera makes four times as many phones as Qualcomm. And, analysts note, none of the major wireless phone makers have made inroads to the Japanese market.

"Nokia would have been the brass ring," said Pete Peterson, an analyst for

Prudential Volpe Technology Group

. He rates the stock a buy, and his firm hasn't done underwriting for Qualcomm. But "the key is to keep the market open for third-party chip manufacturers. It's all about the pace of the market."

The deal guarantees Qualcomm at least some extended business selling chip technology to Kyocera, analysts said. But since the gamble turns on establishing a standard -- or at least preferred -- technology for the industry, Qualcomm stands to lose if the deal proves too small, analysts said.

"At first glance, I think some people are going to walk away disappointed," said David Powers, analyst for

Edward Jones

. "Long-term, I think this deal has some value." Powers rates the stock a hold, and his firm hasn't done underwriting for Qualcomm.