Why Qualcomm Is Interested in Atheros [Updated]

Wireless phone chipmaker Qualcomm is nearing a deal to make its biggest acquisition ever, a takeover of the wireless networking chip concern Atheros. DealBook, which first reported the story, values the deal at about $3.5 billion and says it could be announced as early as Wednesday. Neither company has yet returned my calls to comment on the report.

If such a deal happens, it would get Qualcomm, whose business is tied most closely to the wireless handset business, into the business of supplying chips for Wi-Fi and other wireless networking technologies like GPS, Bluetooth and Ethernet. Atheros’s Align product is a set of chips for 802.11n Wi-Fi networking. According to its 10K report, 43 percent of its fiscal 2009 sales were from its networking segment, which went into wireless routers and Ethernet switches, while 37 percent of sales went into notebook PCs, and 20 percent into consumer devices like game systems, navigation devices and Blu-ray players. These are all markets that Qualcomm has had trouble penetrating.

Atheros says its biggest customers are Hon Hai Precision Industry, the Chinese company that owns the manufacturing behemoth Foxconn, and Nintendo, though that only paints a partial picture.

Update: I asked market research firm iSuppli to look through its database of product teardowns to see where Atheros’s chips have shown up in the past, and the list is extensive. Atheros networking chips show up in numerous notebooks, including Hewlett-Packard’s, Toshiba’s, Acer’s, Asus’s, and Apple’s iMac. They’ve also been seen in several handheld products, including Amazon’s third-generation Kindle, Samsung’s Galaxy S, Sony Ericsson’s Xperia X10, the Nintendo DSi, and Microsoft’s Zune HD. Networking customers include Netgear, 2Wire and Huawei. At least now it’s pretty clear why Qualcomm might be interested.

Sales in 2009 were $522 million, and the average forecast by analysts calls for it to report sales of $922 million for the year ended Dec. 31. Atheros shares naturally shot up by a whopping 19 percent on word of a potential deal. At $44 a share, the stock is now trading at nearly double its 52-week low.

A deal for Atheros would also get Qualcomm’s year off to a potentially positive start following the demise of its FloTV business, though there are also several potential developments in the offing for Qualcomm, including augmented reality and a possible design win in Apple’s iPhone 5. Qualcomm investors appeared to like the notion of a combination with Atheros, too, and sent its shares up by 1.5 percent.

Meanwhile, here’s Walt Mossberg’s interview with Qualcomm CEO Paul Jacobs at last year’s D8.