(QCOM) Qualcomm Announces Acquisition of Atheros

January 7th, 2011

Qualcomm Inc. (QCOM), the largest global manufacturer of mobile phone chipsets, has decided to acquire leading Wi-Fi chip maker Atheros Communications Inc. (ATHR) for around $3.2 billion. According to our view, the primary reason of this acquisition is to offer an innovative product that will ensure seamless mobility between wireless and Wi-Fi networks.

This acquisition will be the largest in the history of Qualcomm. The deal is expected to be closed by mid-2011 subject to regulatory approval and will be slightly accretive to Qualcomm’s earnings in its fiscal year 2012. We believe the acquisition of Atheros will benefit Qualcomm in three ways:

(1) Qualcomm will now become an integrated chipset developer for the mobile computing market. So far, the company benefits from technical exclusivity for both ordinary mobile phones and high-end feature rich smartphones. Qualcomm’s Snapdragon platform now provides chipsets for 77% of Android-based smartphones and also for 9 Windows Mobile 7 based smartphones.

However, mobile computing era is now witnessing the flood of tablets (small-size laptop) that mainly requires Wi-Fi connectivity. Therefore, Atheros will complement this technology. Qualcomm can play as a single window to any wireless gadget maker (mobile phone/tablets) for an integrated Snapdragon chipset platform.

(2) Besides mobile computing, Qualcomm can now diversify in the consumer electronics segment, particularly in the home networking market. Atheros manufactures Wi-Fi chips for televisions, video games, printers, and other home devices.

Recently, Atheros launched a new set of energy efficient chips for wireless routers and consumer electronics. In addition to Wi-Fi networks, Atheros’ chipsets also supports Bluetooth and Ethernet networkinf together with GPS functionality.

(3) Atheros has a very strong list of clientele that includes big names like Dell Inc. (DELL), Hewlett-Packard Co. (HPQ), and Microsoft Corp. (MSFT). In fiscal 2009, the company generated $542 million of revenue. The current consensus estimates for fiscal 2010 revenue is $922 million. At present, Atheros is the second largest WiFi chipset developer holding nearly 21% market share.

We believe Broadcom Corp. (BRCM) will be the potential loser of this deal. Currently, Broadcom is the largest Wi-Fi chipset developer holding around 26% market share. An integrated Snapdragon platform may become a serious threat to its businesses. Intel Corp. (INTC), the undisputed leader of PC, laptops, and netbooks, may also face some challenges. Currently, we maintain our long-term Neutral recommendation for Qualcomm and a Zacks #3 Rank (Hold) on the stock.

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