Why Did Qualcomm Spend $600 Million for Flarion?

Code Division Multiple Access (CDMA) innovator Qualcomm is clearly preparing for the next-generation of mobile telephony with its $600 million acquisition of Flarion Technologies, which was announced Thursday.

Flarion is a pioneer of Orthogonal Frequency Division Multiplex Access (OFDMA) technology and the co-inventor of FLASH-OFDM technology for mobile broadband Internet protocol (IP) services. Flash-OFDM is a signal processing scheme developed with Lucent that supports high data rates at very low packet and delay losses over a distributed all-IP wireless network.

For a company like Qualcomm which has seen its CDMA technology come to dominate the wireless world over competing circuit-switched schemas like Motorola's iDEN, the acquisition represents another coup. Flash-OFDM is considered a key enabling technology for so-called Triple Play (video, voice and data) services from the cellular world's evolutionary standpoint. Flarion's technology is one of several submissions reportedly under consider by 3GPP as a global standard. Plus, Flarion officials have been working closely with several operators worldwide in developing and demonstrating OFDMA technology and products.

"One of Qualcomm's core strength has always been the ability to quickly take technology innovations to market," Dr. Paul E. Jacobs, CEO of Qualcomm, explained on a well-attended conference call to brief investors about the acquisition.

As the wireless world increasing migrates from voice to data transmission, mobile operators are now looking for a way to differentiate their service offerings and OFDM provide them with an avenue to do so, Jacobs told analysts and the media.

To be sure, Jacobs added Qualcomm will still focus on deployment and advancing of its proprietary W-CDMA and CDMA2000 markets. But Qualcomm already has over 120 licensing agreements in place with carriers and manufacturers for CDMA technologies. And the company has apparently put development of EV-DV on indefinite hold due to a lack of interest from mobile operators.

But all the while Qualcomm championed its own circuit-switched CDMA efforts, it was also internally developing its own OFDM technologies over the last few years. With Flarion's intellectual property included in its portfolio, Qualcomm will have one of the broadest portfolios of wireless patents to help operators with the transition, Jacobs said. And it will work with operators and cellular industry standards bodies to deploy OFDM-based or hybrid networks. Qualcomm said it will initially license Flarion's OFDM technologies along with its own patents as part of a multimodal portfolio to carriers and OEMs. Jacobs added the company is also considering a single-mode strategy.

Flarion has already been pilot testing its OFDM technologies, which has been in development since 1997, with major carriers like Nextel and Cellular One. At present, though, Flarion has no cross licensing agreement with OEMs in place to manufacture devices equipped with the technology. However, company insiders told TMCnet that marketing efforts were already underway at the Bedminster, N.J.-based company. That possibly accelerated the acquisition talks and may explain the premium paid in the transaction.

"That was underway and Qualcomm realized now is the time to buy Flarion," said Ronny Haraldsvik, Flarion's marketing chief. "I'm very happy today."

In a joint press statement, Qualcomm said it will pay approximately $600 million in stock and cash. In addition, based on certain milestones over the next few years, Qualcomm may also kick in an additional $205 million in the form of cash and stock. Completion of the acquisition, which is subject to regulatory approval and other customary closing conditions, is expected later this year.

Qualcomm also said it expects approximately $0.03 dilution to pro forma earnings per share in its fiscal year ending September 2006. Additionally, the company expects one-time charges of approximately $10 million, principally related to in- process research and development, upon closing.

But while the deal represented a boon to both Flarion and Qualcomm (and possibly even the consumers because this deal would speed up time-to-market), a big loser could be the companies participating in the WiMAX consortium like Alvarion, ArrayComm or even Intel. That's because, as Qualcomm's Jacobs explained, many of Flarion's OFDM patents apply to same core technologies that would enable WiMAX's broadband mobility specification known as 802.16e. Flarion doesn't participate in the WiMAX consortium and instead favors the lesser known and much-less publicized 802.20 technical spec.

"Given that WiMAX uses the same core OFDMA technology as Flarion, we believe it will be very difficult for the WiMAX consortium to develop standards and intellectual property without infringing on the combined Qualcomm and Flarion portfolio. In our opinion, this could seriously diminish WiMAX's ability to offer a competing and alternative standard to existing 3G cellular standards," wrote Brian Modoff, analyst at Deutsche Bank.

---

Robert Liu is Executive Editor at TMCnet. Previously, he was Executive Editor at Jupitermedia and has also written for CNN, A&E, Dow Jones and Bloomberg. For more articles, please visit Robert Liu's columnist page.

[ Back To TMCnet.com's Homepage ]