It is hard to express all that much sympathy for CEOs who routinely take home millions of dollars for their work, but that doesn't mean they don't face some significant challenges. In particular, management at a company like Qualcomm (Nasdaq:QCOM) is under the seemingly constant pressure to reassure Wall Street that not only is the existing business producing sustainable growth, but that there are avenues to even further growth.
To that end, Qualcomm has had its struggles in expanding beyond its core CDMA technology. With the acquisition of Atheros (Nasdaq:ATHR), though, QCOM is taking a larger bite at the cherry and may just find that it has hit on a winning formula here.
The Qualcomm/Atheros Deal
Atheros shares spiked on Tuesday as rumors swirled that Qualcomm was about to offer $45 a share for the company. As it turns out, those rumors were pretty much spot on - Qualcomm announced Wednesday morning that it was acquiring Atheros for $45 per share in cash, or a total value of $3.1 billion (before netting out Atheros' cash). At a price of $45, Qualcomm is paying a little more than 18 times trailing EBITDA and a better-than-20% premium to the pre-rumor price of the shares. (For more, see A Clear Look At EBITDA.)
What Qualcomm Is Getting
In buying Atheros, Qualcomm is getting a company with a strong WLAN/Wi-Fi business. Atheros' chips are used in a variety of computers, networking equipment, and mobile devices, and the company has recently started trying to expand into areas like ethernet and GPS. Atheros has a rather broad customer base, but not necessarily a very broad business portfolio. To that end, that may have been part of Atheros' motivation in selling out - avoiding the struggles and setbacks that so often occur when specialized chip companies move into new and relatively unfamiliar business lines. (For related reading, check out 2010: The Year In Chips.)
Atheros and Qualcomm have an existing relationship - Atheros sells its Wi-Fi chips with QCOM's basebands to handset companies like Samsung and Motorola - so it is far from a blind deal for QCOM. Moreover, this deal should help Qualcomm become a more effective competitor as a "combo chip" company against the likes of Broadcom (Nasdaq:BRCM). As Atheros has relevant experience in feature integration, lowering power consumption and reducing production costs, this could all work well for Qualcomm.
With all that in mind, QCOM may feel a little more comfortable with this expensive deal than prior smaller acquisitions or organic diversification efforts. Qualcomm recently sold wireless spectrum to AT&T (NYSE:T) for almost $2 billion as part of its exit of the failed Flo TV business - one of the company's more expensive and ill-fated diversification efforts.
A Broader Bottom Line at Qualcomm
Although QCOM's stock is not cheap, and neither is this deal for Atheros, it can at least be argued that the company is making a logical use of its large cash pile. With its strong CDMA business, the Snapdragon processor line (used by companies like HTC and Dell (Nasdaq:DELL), and now a Wi-Fi line, Qualcomm is a good example of what is likely to be the "new" model in semiconductors - large companies with multiple complimentary lines. Texas Instruments (NYSE:TXN) has taken this approach for quite some time, and Intel (Nasdaq:INTC) has been very active in building or acquiring complimentary businesses.
All in all, this move toward semiconductor diversification could be good news for a host of specialized semiconductor companies in the $1 billion to $5 billion market-cap range. Though competing in very different businesses, Atmel (Nasdaq:ATML), ON Semiconductor (Nasdaq:ONNN), Silicon Labs (Nasdaq:SLAB), Cavium (Nasdaq:CAVM) and NetLogic (Nasdaq:NETL) could all be attractive bolt-on deals for larger companies. Better still, they have appealing businesses as stand-alone companies and could all be attractive ideas at the right price. (For more, see Riding The Semiconductor Wave.)
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