Why a Qualcomm-Atheros Merger Makes Sense

Few high-tech acquisitions or mergers make sense on first mention. A deal for Qualcomm Inc. (Nasdaq: QCOM) to acquire wireless chip supplier Atheros Communications Inc. (Nasdaq: ATHR) would be closest to one of the best unions the industry has seen in quite a while.

The two companies play in more or less the same field, although recent events indicate Atheros's focus on the networking and data communication segment through its WiFi and Bluetooth offerings for products such as tablet PCs would likely give it an edge in a market that's growing at a double-digit clip.

News reports on Tuesday, Jan. 4, speculate Qualcomm may offer to purchase Atheros for about $3.5 billion, representing a premium of about 29 percent on its stock price ahead of the announcement. For Qualcomm, which had $10.3 billion in cash and short-term investments as at the end of its last quarter, the deal would represent a smart and strategically important investment.

Here's why the deal makes sense for both Atheros and Qualcomm: Both companies target the wireless market, but Qualcomm is heavily into the handset sector while Atheros is expanding rapidly into networking and wireless communications with products designed to go into tablet computing devices. On Monday, Jan. 3, for instance, Atheros announced a slate of new products, including energy efficient WiFi and Bluetooth solutions for computing and tablet platforms and other chips for portable consumer electronic devices.

Qualcomm cares very much about these types of products today because, while its exposure to the wireless handset market was fine up until now, as consumers embrace tablet devices such as the iPad from Apple Inc. (Nasdaq: AAPL), the company could easily get left behind or find itself unable to stake a claim in a new and rapidly expanding market.

A tie-up with Atheros would give Qualcomm an easier entrance into that market than if it had to develop or modify current products for the sector. Additionally, Qualcomm would gain some highly experienced wireless IC engineers, a customer-focused marketing team already engaged with the biggest OEMs in the sector, and a wealth of intellectual property it can leverage into its current product offerings.

Aside from the premium offered for its shares, Atheros would also benefit from the deeper pockets of its larger rival. Qualcomm dwarfs Atheros in revenues -- $11 billion versus $542 million in their respective last fiscal years -- and can quickly tie Atheros's products into existing customer products. The deal would give Atheros the opportunity to extend its current products into new OEM designs and gain further legitimacy in the market.

Investors like the idea. On Tuesday, they pushed up Atheros's stock price almost 20 percent and lifted Qualcomm's almost 2 percent. Typically, the share price of a potential acquirer comes under downward pressure, but that wasn't Qualcomm's experience in this instance. This confirms investors believe the proposed transaction would be good for Qualcomm and also shows their confidence the deal would have no major hurdles, either in terms of financing or regulatory objection.

I see one challenge, though. If Qualcomm goes through with this transaction, it would represent the biggest acquisition in the company's history. Since the company and its executives have limited experience integrating large acquisitions, Qualcomm and Atheros may find that getting shareholders, other investors, and regulators to approve the transaction may be a lot easier than the challenge of merging two separate corporate cultures.

Even this challenge can be over-emphasized, however. Qualcomm is a behemoth in its segment and Atheros's sales would represent less than one-tenth of its annual sales. Analysts estimate Atheros's revenue for 2011 would be approximately $935 million compared with $12.77 billion for Qualcomm in the 12 months ending September 2011. Swallowing and digesting such a morsel should be as easy as synching two compatible WiFi products.