Qualcomm Agrees to Buy Atheros for About $3.2 Billion

Qualcomm Inc., the world’s largest maker of mobile-phone chips, agreed to buy Atheros Communications Inc. for about $3.2 billion in cash, broadening its lineup of Wi-Fi networking technology.

Atheros investors will get $45 a share, Qualcomm said today in a statement. That’s 22 percent more than Santa Clara, California-based Atheros’s closing price on Jan. 3, before reports about the purchase emerged.

Qualcomm, based in San Diego, aims to nab a bigger piece of the Wi-Fi market and escalate competition with Broadcom Corp. Qualcomm Chief Executive Officer Paul Jacobs said that Atheros will give him a sales force and products tailored for consumer electronics and home networking, helping the company expand beyond mobile phones.

“There’s an opportunity for us to fan out our impact into other devices,” Jacobs said in a telephone interview. “We’re getting a strong and successful sales channel into a bunch of areas that we think are going to be important.”

Atheros rose 64 cents, or 1.5 percent, to $44.64 at 4 p.m. New York time on the Nasdaq Stock Market. They gained the most in almost five years yesterday after the New York Times reported a deal was imminent. The stock added 4.9 percent last year. Qualcomm rose $1.06, or 2.1 percent, to $52.03 today.

Wi-Fi Savvy

The acquisition is Qualcomm’s biggest since it went public in 1991, according to Bloomberg data. The deal may help Qualcomm win orders in new devices for its Snapdragon processor, which currently dominates the market for mobile phones running Google Inc.’s Android operating system. Tablet computers with the Android software are also reaching the market.

Jacobs said that in the future, as more consumer electronics have the capability to communicate wirelessly with other devices, mobile phones will increasingly be used to control and interact with them. Qualcomm wants to be on both sides of that interaction, he said.

Atheros brings expertise in home networking and products that help computers and other electronics link up without wires. That includes Wi-Fi connections in airports, homes and coffee shops. This week, Atheros announced a new set of energy- efficient chips for wireless routers and consumer electronics.

“The name of the game is integration,” Mark Sue, an analyst with RBC Capital Markets in New York, said on Bloomberg Television’s “InsideTrack.” “To line up with Qualcomm and to be integrated into future devices I think is a good deal for both of them.”

Source: Atheros via Bloomberg

Craig Barratt, president and chief executive officer of Atheros Communications Inc. Close

Craig Barratt, president and chief executive officer of Atheros Communications Inc.

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Source: Atheros via Bloomberg

Craig Barratt, president and chief executive officer of Atheros Communications Inc.

Challenging Broadcom

Qualcomm already bundles Atheros’s chips with its baseband processors for mobile phones, and they work together to let devices seamlessly pass calls from cellular to Wi-Fi networks, said Gary Mobley, an analyst at Benchmark Co. in New York.

Qualcomm has tried to grab a bigger piece of the market before. In 2006, the company purchased Wi-Fi chipmaker Airgo Networks Inc., then struggled to gain traction in the area, Mobley said in an interview yesterday.

The Atheros acquisition may give Qualcomm a powerful weapon against Irvine, California-based Broadcom, whose combination Wi- Fi and baseband chips are used by the likes of Apple Inc., Mobley said.

“If Qualcomm can add features like Wi-Fi, it will increase the average selling price they can charge and their available market,” Mobley said.

Boosting Earnings

The number of times people use Wi-Fi hot spots should rise to 11 billion annually by 2014, from 2 billion in 2010, according to consulting firm In-Stat. Companies such as AT&T Inc. are expanding their Wi-Fi coverage, part of a plan to relieve congestion on cellular networks.

Qualcomm is paying about 23 times Atheros’s earnings before interest, taxes, depreciation and amortization. The median Ebitda multiple commanded for similar deals in the industry in the past five years was 15, according to Bloomberg data.

There have been more than 40 acquisitions in the U.S. networking-products industry in the past 12 months with an average premium of 48 percent, according to data compiled by Bloomberg. The premium is calculated from the 20-day average trading price prior to the announcement. The premium for Atheros was 27 percent on that basis.

The average deal size in the networking-products industry was $205.8 million over the same period, including net debt.

Insider Trading

Qualcomm expects to close the Atheros purchase in the first half. The acquisition will be “modestly accretive” to earnings per share in fiscal year 2012, the first full year of combined operations, the company said. Qualcomm had $10.3 billion in cash and short-term investments as of the end of September.

The agreement includes a $103.7 million termination fee, according to an Atheros regulatory filing today. Frank Quattrone’s Qatalyst Partners advised Atheros.

Qualcomm has announced 26 acquisitions in the past five years with an average size of $320.3 million and average premium of 8.9 percent, according to Bloomberg data.

Atheros will become Qualcomm Networking & Connectivity, or QNC, and Atheros Chief Executive Officer Craig Barratt will become president of that division.

Atheros was one of the companies tarnished by the insider- trading case involving Galleon Group LLC. In November, former Atheros Vice President Ali Hariri was sentenced to 18 months in prison as part of the crackdown on the hedge fund.

Hariri, who was a manager at Atheros’s broadband-networking unit, was the third person to be sentenced in the Galleon case. He was ordered to pay a $50,000 fine.

To contact the reporters on this story: Olga Kharif in Portland, Oregon, at okharif@bloomberg.net; Sarah Rabil in New York at srabil@bloomberg.net

To contact the editors responsible for this story: Tom Giles at tgiles5@bloomberg.net; Peter Elstrom at pelstrom@bloomberg.net

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