Starboard acquires a stake in Qorvo. How the activist can help improve margins

Business: Qorvo is a global semiconductor solutions provider. The company operates through three segments: High Performance Analog (HPA), Sensors and Connectivity Group (CSG), and Advanced Cellular Group (ACG). The HPA segment is a global provider of radio frequency (RF), analog mixed signal and power management solutions. The CSG segment is a global provider of connectivity and sensor solutions. ACG segment is a global provider of cellular RF solutions for smartphones, wearable devices, laptops, tablets and other devices.

stock market value: ~$8.41 billion ($88.94 per share)

Qorvo was formed as a result of a merger of equals in an all-stock transaction between RF Micro Devices (RFMD) and TriQuint Semiconductor (TQNT) that was announced in February 2014 and completed in January 2015. Starboard is quite familiar with Qorvo considering the company filed a 13D return with TriQuint in 2013. On October 29, 2013, Starboard sent a letter to TriQuint describing the company’s undervaluation and underperformance and presenting proposals to improve the value. December 2, 2013, starboard nominated a majority list of six director candidates for the board of directors for the 2014 annual meeting. However, the compromise never escalated to a proxy fight, as Starboard issued a letter supporting TriQuint’s proposed merger with RFMD in March 2014 and exited of your 13D. In less than a year of commitment, Starboard achieved a return on its investment of 113.15% compared to 23.80% for the Russell 2000.

The merger was presented to shareholders as an opportunity to create new growth opportunities in mobile devices, network infrastructure and aerospace and defense, driven by the new company’s scale advantages, product portfolio, improved operating model and 150 millions of dollars in cost synergies. The announcement was met with tremendous enthusiasm, as shares of TriQuint and RFMD soared approximately 200% from the day before the announcement to their combination. However, a year after the transaction, the newly formed Qorvo was down 27.7%. For nearly a decade, from the completion of the merger until the day before Starboard Value disclosed its 7.71% stake, the stock traded flat, up just 4.5%. This is a rather surprising underperformance when semiconductors have been the beneficiaries of tremendous secular tailwinds in recent years. Over the same period, Philadelphia’s SE Semiconductor Index has risen more than 650%.

The opportunity to improve value at Qorvo is simple, operationally focused, and something Starboard has done many times across many semiconductor companies: improve margins. Despite Qorvo’s excellent product portfolio and its competitiveness with its peers Broadcom and Skyworks SolutionsThe company’s gross and operating margins have been lower. Last fiscal year, Qorvo had a gross margin of 39.5% and an operating margin of 8.3%, while peer Skyworks had margins of 44.2% and 24.9% respectively. Despite having roughly similar revenue levels ($4.7 billion for Skyworks and $3.8 billion for Qorvo), Qorvo spends 10.3% of revenue on selling, general and administrative expenses versus 6.6% for Skyworks and 18 .1% of R&D revenue compared to 12.7% for Skyworks. Additionally, Qorvo spends an additional $104 million (2.8% of revenue) on “other operating expenses.” This is a clear sign that a board and management team needs discipline and one of the main reasons Qorvo received such a high vulnerability rating in 13D Monitor’s enterprise vulnerability ratings database.

Each activist has a different style with varying levels of success across industries and strategies, but it’s hard to find a more successful combination than Starboard in a semiconductor company with margin-enhancing opportunities. Starboard has previously initiated activist campaigns at the following 13 semiconductor companies: Actel, Microtune, Zoran, DSP Group, MIPS Technologies, Integrated Device Technology, Tessera, TriQuint Semiconductor, Micrel, Integrated Silicon Solution, Marvell, Mellanox Technologies and On Semiconductor. In all of these campaigns, Starboard has had a positive return on its investment and its average return on the 13th is 85.87% versus an average of 28.91% for the campaign. Russel 2000 during the same time periods. Starboard’s modus operandi in these situations has been to take a seat on the board if necessary, institute a philosophy of discipline that leads to more efficient SG&A and targeted R&D, and helps improve operating margins. . Additionally, at companies like On Semiconductor that were operating at low utilization levels, Starboard helped size capacity for more realistic manufacturing levels by consolidating factories and using external foundries for greater flexibility. The same opportunity exists here, which could lead to further margin improvement.

We have no doubt that Starboard will want board seats and believe this should be a quick deal for several reasons. First, Starboard’s experience and track record with the semiconductor companies described above is impeccable. Second, it is indefensible to be a semiconductor company in 2025 that has deprived its shareholders of any real profitability for the last ten years. Third, Starboard already has relationships with three of Qorvo’s companies. eight directors including its president, all of whom were directors of TriQuint when Starboard incorporated there: Walden C. Rhines (president), David HY Ho and Roderick D. Nelson. Fourth, of the company’s eight directors, five have served on the board in the 10 years since the TriQuint/RFMD merger, and one (David HY Ho) has informed the company of his intention to retire and not stand for re-election at the company’s next annual meeting. Once on the board, Starboard representatives and the rest of the board will have the opportunity to evaluate whether this is the right management team to turn around Qorvo’s recent performance. If they decide that new management is needed, it is important to note that there has been enormous consolidation in the semiconductor industry in recent years, which has resulted in many experienced and talented operators being left on the sidelines.

Qorvo’s director nomination window doesn’t open until March 16, 2025, and we’d be very surprised if a deal isn’t reached before then.

Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of 13D activist investments.