Qualcomm + Atheros- why this makes sense and who should worry

Earlier this month, Qualcomm announced the acquisition of Atheros a leading wifi chipset maker for $3.1 Bil amounting to about $45/share in cash.

This deal has relative similarities with other deals in the last couple of years in the technology industry where the theme has been ‘consolidation’, ‘one stop shop’, ‘converged infrastructure’ – think Sun-Oracle, SAP- Sybase, HP- Palm. Though every deal screams ‘synergy’ post-merger considerations can undo the overall value that shareholders expect to see. This one however seems a winner due to the acquirer’s presence in a high growth market.

Qualcomm’s deal is quite interesting from the smartphone marketplace standpoint.  It seems to be targeted squarely at consolidation of technologies inside a ‘smartphone’

Let’s look at the top dog- the iphone 4. From the  isuppli tear down for the bill of materials for the iphone 4, the core A4 processor is estimated at ( $10.75 per unit and the Broadcom wireless lan (Wlan) module at $7.80. Here Qualcomm has no play. It does so however in the upcoming iphone that Verizon is going to launch because of its strong presence in the CDMA space.

HTC EVO is another high end smartphone. This does include Qualcomm’s snapdragon processor but Wlan is again Broadcom. It is a similar story in the Google Nexus one phone.

This acquisition enables Qualcomm to offer better prices to smartphone manufacturers at the same time impacting the market share of competitors like Broadcom. Consolidating the core processor and the WLAN chips ( which also may include integrated Bluetooth and FM capabilities) will enable Qualcomm to command a greater share of the ‘essential’ communication components inside the smarphone.

Beyond smartphones there are certainly other pieces that make sense in this acquisition. Per isuppli again, the worldwide Wlan market is expected to triple in size from 2009 to 2014 to about $8.8 Bil. In addition there are newer technology pieces that Atheros brings like Powerline technology that enables a home’s power circuit to carry data packets. However given Qualcomm’s strong relationships with wireless carriers and manufacturers, they will mostly take an integrated technologies approach and target the smartphone space more than ever.

In fact I would even hazard that the main value of this deal is to enable them to get a piece of the iphone action- especially future models like the iphone 5. Certainly something that can cause Broadcom to worry.

An integrated approach will also help Apple to increase their per device profitability by standardization but whether they replace the successful A4 processor with a Snapdragon remains to be seen.