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Qualcomm-Atheros to propel 'combo' efforts

Mark LaPedus

Qualcomm Inc.'s surprising move to acquire Atheros Communications Inc. for $3.1 billion will enable Qualcomm to accelerate its efforts in the ''combo'' or integrated cellular-chip platform arena.

With the acquisition of San Jose-based Atheros, announced on Wednesday (Jan. 5), Qualcomm (San Diego) hopes to speed up its efforts to offer more integrated chip solutions for a new crop of mobile and tablet PC customers, including Apple, HTC, Motorola and others.

The deal will also enable Qualcomm to enter into new markets, such as Ethernet, home networking, passive optical networking (PON) and others. Atheros also competes in the Bluetooth, WiFi, WLAN and other markets.

More importantly, with the help from Atheros, Qualcomm also hopes to fend off competitive threats coming from the likes of Broadcom, Marvell, TI and others. Still, there are some major integration issues between the two companies. And there are some overlapping products, especially in WLAN and the processor intellectual property (IP) spaces.

As expected, Qualcomm has entered into a definitive agreement to purchase Atheros for $45 per share in cash, representing a value of $3.1 billion. The deal creates a company with combined sales of $11 billion, based on revenues from 2009.

As part of the plan, Atheros will become the new Qualcomm Networking and Connectivity group. Atheros’ current president and CEO, Craig Barratt, is expected to join Qualcomm as president of the group. He will report to Steve Mollenkopf, executive vice president and group president of Qualcomm.

The acquisition is intended to help ''accelerate our products beyond cellular,'' said Paul Jacobs, chairman and CEO of Qualcomm, during a conference call with analysts to explain the deal.

Without a doubt, Qualcomm is scrambling to expand beyond its cell-phone chipset market. The company is a powerhouse in the cell-phone chipset business-where it is the clear leader in the baseband segment-but it has struggled to find other engines for growth.

For example, Qualcomm has recently shut down its Flo TV mobile operation and sold the spectrum to AT&T. And it is struggling to gain traction in mobile WLAN, RF and LCDs. Qualcomm is devising a display technology called Mirasol. And Qualcomm's Brew operating software (OS) technology is losing steam against the likes of Apple's OS, Android, among others.

The company also hopes to jumpstart-and generate some new business-for its embryonic efforts in 3-D chips, augmented reality, peer-to-peer and other newfangled technologies. But most of those technologies are still in the embryonic stages and will take years to generate sales.

For now, Qualcomm is somewhat dependent on the topsy-turvey cycles in the handset market. And the average selling price (ASP) for its baseband chip products have been under pressure in recent times. Qualcomm recently reported revenue of $2.95 billion for the quarter ended Sept. 26, up 9 percent compared with the previous quarter and up 10 percent compared with the year-ago quarter. The company posted a net income for the quarter of $865 million, up 13 percent sequentially and up 8 percent year-to-year. Analysts were expecting Qualcomm's revenue for the quarter to be about $2.85 billion, according to Yahoo Finance.

Atheros recently said revenue in the third quarter of 2010 was a record $247.1 million, up 4 percent compared to $238.2 million reported in the second quarter of 2010. Third quarter 2010 revenue increased 58 percent compared to $156.6 million reported in the third quarter of 2009. The company recorded net income in the third quarter of 2010 of $28.1 million or $0.39 per diluted share. This compares to GAAP net income of $29.7 million or $0.41 per diluted share in the second quarter of 2010. Net income in the third quarter of 2009 was $38.6 million or $0.60 per diluted share.

A 'combo' play?

For some time, Atheros reportedly may have been on the block. ''Atheros has been in search of scale,'' said analyst Mark McKechnie of Gleacher & Co. ''We believe Atheros may be more willing than in the past given the company's realization that it needs scale to compete with the likes of Broadcom, Qualcomm, Marvell and others. This becomes more acute as the heavies move to integrate connectivity into their baseband and application processor roadmaps.''

Meanwhile, in its core baseband business, Qualcomm is seeing new and emerging competition from Broadcomm, Fujitsu, Intel, Marvell, MediaTek, Renesas and ST-Ericsson. In addition, Qualcomm also competes in the mobile Internet device (MID) processor space with an ARM-based product called Snapdragon. Others also compete in the space, including Freescale, Intel, Nvidia, TI, among others.

In both segements, there has been a clear trend: integration. For years, Qualcomm has integrated more and more features and technologies into its basebands. By buying Atheros, it can accelerate those efforts, according to analysts.

''By acquiring Atheros, Qualcomm would be in a better position to integrate full connectivity features-(such as) Bluetooth, WiFi, GPS, etc.-into its Snapdragon application processors,'' said Gary Mobley, an analyst with The Benchmark Co., in a report.

''Assuming Qualcomm can integrate full connectivity features into its Snapdragon application processors, Broadcom’s competitive position with its combo chips might be compromised,'' he said. ''However, this integration strategy for Qualcomm would take years to evolve.''

''Qualcomm has announced plans to integrate WiFi into its 8960 chipset expected for 2H11. We believe this project is on track, but Atheros' roadmap for WiFi is broader and deeperthan Qualcomm, which is playing 'catch-up,' '' said McKechnie of Gleacher & Co. ''Atheros' involvement in key standards committees and deep IP portfolio would add key competencies to Qualcomm as WiFi penetration increases with the shift to the mid-range in smartphones.''

WiFi may remain a discrete solution at the high-end of the market, but it likely to become integrated for volume products, McKechnie said. ''Atheros has been a (WiFi) reference design partner for Qualcomm since 2006, and would provide Qualcomm with a high-end option for the OEMs that prefer cutting edge-discrete solutions with capabilities for integration for more cost effective mid- and low-end solutions,'' he said. ''We would view an Atheros acquisition as strategically positive for Qualcomm as it accelerates its efforts to gain more content in notebooks, tablets and smartphones.''

Others agree. ''Qualcomm is strong when it comes to cellular technologies and mobile application processors,'' said Romit Shah, an analyst with Nomura in a report. ''The key to maintaining this lead in the mobile silicon space is a tighter integration of well-performing IPs to deliver better power/performance characteristics. However, Broadcom and Marvell have been encroaching on Qualcomm’s turf by integrating IPs like WiFi, Bluetooth, and GPS into their newly developed cellular baseband chips.''

The proposed deal will also propel Qualcomm into new and much-needed growth markets, such as WiFi. Qualcomm fields a WLAN-like technology called Gobi. ''From a strategic standpoint, we believe the transaction makes sense for Qualcomm. In addition to acquiring the best-in-class WiFi technology (Atheros has 20-25 percent share), Qualcomm also expands its addressable market through Atheros’ footprint in mobile computing and consumer electronics,'' Shah said.

This week Atheros unveiled a wireless solution for tablets and portable consumer electronic (CE) devices. Extending Atheros’ line of combination products for computing and consumer devices, the new AR6233 offers both 802.11n Wi-Fi and Bluetooth 4.0 technologies on a system-in-package (SIP) solution-the compact form factor preferred for CE designs.

New markets

There are other growth opportunities for the company. ''Qualcomm also gains a more diverse revenue portfolio from Atheros’ Ethernet, PowerLine Communications (PLC), and optical networking (EPON) businesses. While revenue contributions from these technologies are still small today, we believe they could be significant growth drivers in the future,'' he said.

Both Atheros and Qualcomm offer WLAN products. In 2006, Qualcomm acquired Airgo, which pioneered 802.11n. ''In a bid to get ahead of IEEE specs, Airgo lost ground to Broadcom and Atheros, which have about 31 percent and 25 percent of WLAN market share, respectively,'' he said. ''We believe a strong IP in 802.11n is essential in maintaining a competitive edge in the integrated mobile chipset (market) like Snapdragon.''

This week, Atheros announced two highly-integrated 802.11n solutions that bring high-end performance and features to mainstream Wi-Fi routers and residential gateways. The new Align AR933x and XSPAN AR934x system-on-chip (SoC) solutions include all of the major components required to build 1-stream or 2-stream 802.11n routers, respectively.

However, there are some competitive implications in terms of processor IP.''Atheros is a MIPS house, and Qualcomm is an ARM house,'' said Mobley of Benchmark.''As often the case, the dominant processor architecture used by the acquirer takes precedent.''