Few investors had more at stake in Broadcom’s $117 billion hostile takeover bid for the chip-maker Qualcomm than Jerome L. Dodson, the founder and chief executive of Parnassus Investments in San Francisco, and chief portfolio manager for the Parnassus Endeavor mutual fund.
Endeavor owns 8.3 million Qualcomm shares, making it one of the company’s largest shareholders. A week ago the shares were worth over $500 million and accounted for nearly 10 percent of Endeavor’s assets, a highly concentrated position.
By pursuing a mix of value and socially responsible investing — avoiding companies that harm the environment, and favoring companies that treat their employees well — Mr. Dodson has emerged as one of his generation’s most successful investors. Morningstar ranks his Endeavor fund first among large capitalization blended mutual funds over 10-, five- and three-year periods.
Then, this week, President Trump killed Broadcom’s takeover bid on national security grounds, and Qualcomm shares plunged. They dropped more than 5 percent on Tuesday, a $25 million hit to the Endeavor fund.
Yet when I spoke to Mr. Dodson this week, he was not only serenely unruffled by the president’s decision — he applauded it.
“There’s no doubt I would have made a quick profit if the Broadcom deal had gone through,” he said. “But as a shareholder, I voted against it.”
That’s partly because, “as a citizen, I didn’t like the deal,” he said. Broadcom typically slashes costs, especially research and development, and the company said it would do exactly that if it acquired Qualcomm. “In the long run that’s not good for the country or for society,” Mr. Dodson said.
He agreed with the Trump administration’s assessment that, by cutting Qualcomm’s research costs, Broadcom would be assisting Chinese rivals in the global race for dominance in 5G communications technology.
But as an investor, his reasoning can pretty much be reduced to one word: Apple.
Apple has traditionally been one of Qualcomm’s biggest customers, along with Samsung and every other major handset company. But the two technology giants are also embroiled in an epic battle over licensing fees for Qualcomm’s patented technology, with profound implications not only for Qualcomm’s business model and Apple’s profit margins, but the future of wireless communication.
If Qualcomm and Apple can just bury the hatchet, Mr. Dodson reasons, Qualcomm’s revenues would soar, and its stock price would climb well past Broadcom’s offering price of $79 a share. By Mr. Dodson’s reckoning, once Apple resumes paying Qualcomm, the chipmaker will be worth at least $84 a share, “which is why Broadcom’s offer didn’t really engage my attention,” he said.
That, however, is a big “if,” given the intractable positions both sides have staked out.
At the heart of the dispute is the way Qualcomm calculates the licensing fee it charges customers, which is a percentage of the cost of the net selling price of the entire handset — and not the price of the chip. That means that Apple, a high-cost producer whose iPhone X sells for as much as $1,000, has paid much higher licensing fees than low-cost competitors using exactly the same chip set.
Apple has called the arrangement an “extortion scheme.” It infuriates Apple that Qualcomm has, in effect, been subsidizing its low-cost competitors, including the very Chinese companies that Mr. Trump says he is so concerned about.
Qualcomm has countered that its intellectual property makes many of the iPhones’ distinctive features possible, features that low-cost competitors haven’t replicated, and therefore Qualcomm deserves a percentage of the cost of the entire device.
Mr. Dodson made little immediate headway when he met with a delegation of top Qualcomm officials late last month and pressed his case for a settlement with Apple. The officials, including the chief executive Steve Mollenkopf and Paul Jacobs, a Qualcomm founder and, until recently, executive chairman, visited Mr. Dodson in San Francisco to make their case against the Broadcom bid.
In Mr. Dodson’s account of the meeting, he urged the Qualcomm executives to settle with Apple rather than risk alienating it as a customer over the long term. But Qualcomm officials said Apple was demanding more than they were prepared to give and that, on an engineering level, relations with Apple remained good. They assured him that eventually they would reach a settlement, revenues would normalize, and Qualcomm stock would respond.
Still, “I’d like to see them budge” on the licensing issue, Mr. Dodson said. “I can see Apple’s point.”
But if Qualcomm stopped charging Apple a percentage of the device’s cost, it would probably have to extend similar terms to all its major customers. It recently amended its agreement with Samsung without abandoning its approach to license fees. At the meeting, Qualcomm officials told Mr. Dodson they offered Apple similar terms, but Apple rejected them.
A Qualcomm spokeswoman declined to comment, as did an Apple spokeswoman.
Long-simmering tensions between Qualcomm and Apple reached a boiling point in 2016, when Qualcomm halted rebates it was giving Apple. Qualcomm claimed Apple had violated the terms of the rebate agreement by cooperating with South Korea’s investigation into what Samsung and others said was exclusionary conduct by Qualcomm. Apple responded by withholding the license fees it paid manufacturers of iPhones, who in turn stopped passing on the payments to Qualcomm.
Lawsuits and counterclaims erupted, and Qualcomm reduced its revenue estimates by $500 million a year.
While Apple has continued to buy and deploy the latest Qualcomm chips, it also reached out to a rival chipmaker, Intel, which began supplying an alternative to Qualcomm’s chip for the iPhone 7 (that phone, the iPhone 8 and the X may contain either a Qualcomm or Intel chip).
Qualcomm claims that Apple has compromised the performance of Qualcomm-equipped handsets in order to mask their superiority over the Intel-equipped phones. (Both Intel and Apple have vehemently denied the claims.)
Numerous lawsuits are now well underway in the United States, with some expected to go to trial later this year. Regulators in the European Union, Taiwan, South Korea and China have ruled that Qualcomm’s licensing practices are unlawful and have levied fines, decisions that Qualcomm is appealing. In the United States, the Federal Trade Commission is conducting its own investigation.
While armies of patent lawyers fight over the rival claims, investors have already rendered a verdict. Qualcomm shares, after peaking at more than $80 in 2014, dropped by nearly 50 percent, hitting a low of $44 a share in 2016.
Qualcomm’s precipitous decline is what attracted Mr. Dodson’s attention along with other so-called value investors, who look for stocks trading below their intrinsic value. He said his fund’s average cost per share for its Qualcomm position is about $56, so the fund was still ahead even after the deal collapsed this week. On Thursday Qualcomm was trading at around $60.
Still, Qualcomm’s performance has knocked the Endeavor fund from its perch at the top of the Morningstar rankings. So far this year it’s 61st.
Now that Mr. Trump has rescued Qualcomm from the imminent threat of a Broadcom takeover, its financial prospects — and share price — will largely follow the twists and turns in the Apple standoff. While Mr. Dodson remains optimistic about the outcome, that doesn’t mean he’s against all potential takeovers of Qualcomm.
Last week there were rumors that Intel might launch a bid for Broadcom, which made Mr. Dodson wonder: “Why doesn’t it bid for Qualcomm? If Intel bought it, Qualcomm would be in good hands.”
“As a citizen, I’d be very comfortable with that,” he said.