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Why a Qualcomm-Atheros Merger Makes Sense

Few high-tech acquisitions or mergers make sense on first mention. A deal for {complink 4505|Qualcomm Inc.} to acquire wireless chip supplier {complink 514|Atheros Communications Inc.} 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 {complink 379|Apple Inc.}, 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.

7 comments on “Why a Qualcomm-Atheros Merger Makes Sense

  1. AnalyzeThis
    January 5, 2011

    Very good article Bolaji… I agree that the merger makes sense, but you brought up a few points I really hadn't thought of.

    Of course, I do believe that the deal would make even more sense if Qualcomm was able to negotiate a slightly more favorable deal. That being said, I don't think the terms are too far off the mark.

    I must admit that I hadn't given too much thought to the acquisition-related integration challenges that Qualcomm will likely face. This, I believe, is absolutely critical to the long-term success of the deal. Let's hope the marriage gets off on the right foot.

  2. eemom
    January 5, 2011

    On paper, this makes perfect sense.  With Atheros sales projected to explode, I would agree that Qualcomm has to pay a premium for the company. 

    In reality, the merging of two companies, can be very challenging.  The only positive here is that Qualcomm is so much larger that they may be able to absorb Atheros without too much trouble.  Hopefully the Atheros employees will benefit long term from this merger – in addition to the short term stock incentives.

  3. DataCrunch
    January 6, 2011

    As we discussed in our Intel v. ARM post(s) not long ago, Intel has been aggressively moving into the mobile device space.  Qualcomm in now positioning itself to move into Intel’s world.  Qualcomm may become a thorn in Intel’s side sooner rather than later.

  4. bolaji ojo
    January 6, 2011

    Qualcomm is also positioned now with the Atheros purchase to take on Broadcom, accoding to iSuppli. In fact, the lines of differentiation between semiconductor companies supply products to computer manufacturers, mobile phone OEMs and tablet device OEMs are blurring rapidly. At the ongoing Consumer Electronics Show, Microsofit demonstrated a Windows Operating System that works on ARM-based processor. It didn't say whether this would compete with the Intel x86 processor but I am now beginning to think the microprocessor market is going to be intensely competitive over the next few years with more companies diving in. The same is happening in the tablet and smartphone market.

  5. elctrnx_lyf
    January 10, 2011

    Bola Ji, As you comment out the gaps are definitely getting blurred with recent blown out tablet market. The smart phones and the tablets almost require the similar hardware excluding the mobile connectivity. Quallcom and Atheros will together means definitely a very big market share and it does affect the Intel if Quallcom can come out with smartphone or tablet solution with high integration using the Quallcom application processors and their own wireless interface components.

  6. elctrnx_lyf
    January 10, 2011

    I couldn't include this in last post. But I feel the ground of processors is actually looking good with more players being added. AMD is trying hard to get into the matket with thier fusion and Brazo platforms while ARM is going in a big way to release the processor for computer applications. If windows supports ARM in their desktop processors and Server processor versions we will see rise of third big contributer to the processor supplier in addition to AMD and Intel. All these vendors will be launching new platform with integrated GPU's and then all it matters is performance and cost.

  7. bolaji ojo
    January 10, 2011

    In many ways it is good for businesses and consumers that the market for microprocessors could be expanding to include more suppliers. Intel has earned its bragging rights in the PC microprocessor industry but we won't really know ever how much better the segment would have developed had there been other strong players in the market.

    If ARM-based microprocessors penetrate the PC market that would be a good thing. Same thing in the smartphone, tablet device and integrated device markets. By entering the market, Intel promises to make it even more competitive and diverse, developments that will be good for equipment buyers.

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