Qualcomm to Buy Atheros for $3.1 Billion

JANUARY 5, 2011 WALL STREET JOURNAL

By SHARA TIBKEN
Qualcomm Inc. agreed to buy Wi-Fi chip maker Atheros Communications Inc. for $3.1 billion in cash as it aims to address growing demand for devices that use Wi-Fi to connect to the Internet.

The deal—Qualcomm's largest acquisition to date—fills a hole in the company's communication-chip offerings. The importance of Wi-Fi has been growing as more devices—including smartphones, tablets and notebooks—connect to the Internet.

"We see this evolution of the industry where wireless and connectivity go into a bunch of devices around us," Qualcomm Chairman and Chief Executive Paul Jacobs said in an interview. "And we want the phone to be able to interact with those devices."

The deal, which values Atheros at $45 a share, comes during a flurry of acquisitions in the technology sector and puts pressure on Qualcomm's rivals, such as Broadcom Corp. Chip companies, including Intel Corp., have been using their high levels of cash to make purchases to add more features to their chips. Qualcomm has about $10 billion in short-term cash and marketable securities. Adding long-term marketable securities raises the figure to $18.4 billion, with $12.1 billion of that located offshore, the company said.

Atheros shares were up 1.2% at $44.53 at midday Wednesday on the Nasdaq Stock Market, adding to a 19% jump Tuesday when news of a potential deal was first reported. Qualcomm, meanwhile, was up 1.9% at $51.93 at midday Wednesday. Broadcom was off 1.5% at $42.65; company officials haven't responded to requests for comment. Qualcomm and Broadcom also trade on the Nasdaq market.

Qualcomm, which helped popularize a technology used in many cellphones, has benefited from its high exposure to the sweet spot for consumers, specifically smartphones and other mobile devices. In November, the company posted better-than-expected fiscal fourth-quarter results and forward-looking guidance.

A takeover of Atheros gives Qualcomm greater exposure to Wi-Fi chips and other markets where it doesn't have a significant presence, including providing components for laptop personal computers, which now come standard with Wi-Fi chips.
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"We like the strategic nature of the deal from Qualcomm's perspective," Sanford C. Bernstein analyst Stacy Rasgon said. "Acquiring Atheros would fill a rather gaping hole in Qualcomm's 3G-only product portfolio and grant the company access to markets they currently miss."

Qualcomm has been developing Wi-Fi internally, buying a privately held company in 2006 to speed those efforts, and it has partnered with Atheros for years.

Mr. Jacobs said the acquisition isn't intended to replace what Qualcomm is already doing, but instead will be complementary to its current efforts. In addition, he said, Qualcomm won't have to make the new hires it had planned for developing Wi-Fi.
"We already had Wi-Fi for the phone," he said. "But what we're going to be able to do is put investment into other kinds of connectivity and spread it across a broader set of products. ... We're using the acquisition to put the accelerator down on the plan we already had."

In addition, the purchase gives Qualcomm a new distribution channel, Mr. Jacobs said.
The deal is expected to close in the first half of 2011 and modestly add to Qualcomm earnings in fiscal 2012. Atheros will be renamed Qualcomm Networking & Connectivity, and Atheros President and CEO Craig Barratt will join the company as president of the group. Mr. Jacobs said Qualcomm also plans to retain the rest of the Atheros senior management team.

He said the purchase will be funded by offshore cash—money that isn't used for dividends and stock buybacks. In addition, the deal includes a "customary" break-up fee, Mr. Jacobs said, though he isn't worried about counteroffers.

"We looked around to see what set of companies would bid, and we think we're in a strong position," he said. "We feel good about this closing in the first half."
Mr. Jacobs added that while the company doesn't have any other large acquisitions planned, it will continue looking at potential targets. "If you look at the vision we have of devices being connected, there's a lot of opportunity there," he said.