Investopedia: Qualcomm Takes Another Shot At Diversification

t 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.)

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Is This The Dip To Buy TSMC?

"Buy on the dips" is another one of those Wall Street sayings that gets repeated to the point of cliché. Unfortunately, it is never quite so easy. Dips are scary times to buy anything, because it goes against reason to buy when things seem to be getting worse. Besides, every abject failure starts as a "dip" and buying those stocks has a way of making the buyer feel like a "dip".

And yet, maybe this is one of those dips where investors should consider a stock like Taiwan Semiconductor (NYSE:TSM).

The Quarter That Was
Like a lot of the semiconductor companies it provides fabrication services for, TSM had a solid third quarter. Revenue rose 25% from last year and 7% on a sequential basis. Gross margin improved a bit, and operating income rose 35% from last year and 6% sequentially. Shipments were up 31% and 9%, respectively, and ASPs were down by a manageable low single-digit amount. 

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Atheros and Texas Instruments - Chips Ahoy

Atheros (Nasdaq:ATHR) and Texas Instruments (NYSE:TXN) are indeed very different kinds of chip companies, but there are basically in the same boat today. The big rebound in chip demand is over, demand and supply are basically back in alignment and investors are probably looking at a couple quarters of uninspiring performance before growth returns. 

The Quarters That Were
Atheros reported 4% sequential sales growth, as an exceptionally strong result in the consumer business offset weakness in PCs and networking. Inventories rose by 10% on a sequential basis, and the company trimmed fourth quarter guidance by about 10% relative to prior expectations. While the company has quality customers like Hewlett Packard (NYSE:HPQ) and Amazon (Nasdaq:AMZN), consumer products cannot fully compensate for the weaker PC and networking environment. Atheros is still small enough that individual product delays like the pushout of Nintendo's 3DS still matter.

For the far larger Texas Instruments, sales were up a similar amount - 7% on a sequential basis. TI did see an improvement in gross margins, though. Performance was strongest in high-performance analog, but a 0.92 book-to-bill is not encouraging, and it looks like TI is in for a couple of quarters of sequential revenue declines. That is broadly consistent with what Linear Technology (Nasdaq:LLTC), another major analog player, has been saying and TI management does not seem to see anything unusual in this mid-cycle slowdown. (For more, see Is Linear A Canary Or A Duck?)

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