Qualcomm

(QCOM) - Get Report

wants to go to Europe, but not just for the summer.

The wireless pioneer Tuesday moved to separate its semiconductor business from its core phone-technology business, setting a chip-unit IPO and planning to spin the rest off to shareholders within a year. Investors applauded the move, driving Qualcomm shares up 7.5%.

Behind the move is Qualcomm's desire to tap the huge European and Asian mobile-phone chip markets. Mobile phones in Europe and Asia use a different wireless-telephone standard than Qualcomm's phones, which has meant Qualcomm phones are locked out of those lucrative, growing markets, at least until the widely heralded third-generation wireless standard arrives. Accordingly, the company has been locked out of making chips for phones on the competing standard, as well.

But in setting the spinoff, Qualcomm is trying to give its chips business advantages it never had. By separating the unit and giving it some key patents for Qualcomm's CDMA wireless standard, Qualcomm will enable the unit to negotiate cross-licensing deals with makers of phones on the bigger GSM standard. The move should give the unit, called

Spinco

for now, a foothold overseas, assuming it can strike deals with competitors such as

Nokia

(NOK) - Get Report

and

Ericsson

(ERICY)

. That could allow the hot semiconductor business to grow without compromising the phone-technology royalties that make up the lion's share of Qualcomm's profits.

Getting Together

Qualcomm is the leading purveyor of so-called code-division multiple access wireless technology. Proponents believe CDMA is technologically superior to other wireless standards, including the world's leading standard, which is known as global systems for mobile communications, or GSM. That thinking drove the 2,600% gain in Qualcomm shares for 1999, though the mania has since subsided, leaving Qualcomm some 65% off its high.

Now, the semiconductor unit is seeking a GSM partner, according to Qualcomm CFO Tony Thornley, who says the decision to create Spinco wasn't born out of discussions with or demands by possible collaborators. The company is likely to announce a partnership with one GSM player this fall, though Thornley adds, "We're still exploring all alternatives." Other alternatives include proceeding alone or acquiring a GSM player.

"The partnership avenue is probably the best," the executive says, adding that the ability to bring products to the market quickly will play a large role in choosing a GSM partner.

Upturned Noses

GSM players had turned their noses up at Qualcomm and the idea of paying for access to its CDMA patents. Spinco creates an opportunity for the cross-licensing of CDMA and GSM patents, providing solid benefits to both sides of the equation, while Qualcomm will still keep other patents and its rights to those royalities, Thornley says.

"Without

access to GSM and the WCDMA market, they'd be limited to a smaller piece of the pie," notes Pete Peterson of

Prudential Securities

. "This is another step in the elaborate dance of what the tenor of determining what the

third-generation wireless market will be like." Prudential hasn't underwritten for Qualcomm, and Peterson has a strong-buy rating on the stock. WCDMA is in some ways similar to Qualcomm's CDMA technology, and is thought to play an important part in any third-generation standard.

"The bottom line is that Spinco enables the growth of the chip business and at the same time allows Qualcomm to expand its royalty revenues and focus on the development of wireless Internet," Thornley says.