The San Diego based company is already a major supplier of microchips that handle data and voice communication in phones. But until now, Qualcomm has made less progress on its own in developing chips that incorporate advanced networking functions in tablet devices such as the iPad.
With Atheros, it is buying a key producer of chips used in WiFi, Bluetooth and Ethernet networking, along with GPS systems.
The companies sell complementary products: Qualcomm is best known for supplying chips to the telecommunications industry for running mobile phone systems and modems. Atheros sells WiFi chips and other communications chips to makers of consumer electronics such as video games, tablets, televisions, printers and other devices.
"They are buying them to expand their business," said Philip Solis, research director for ABI Research.
Qualcomm is betting the deal will beef up its position in the market for new types of mobile devices, which is expected to explode in 2011 with tablet computer offerings to compete with Apple Inc's iPad. It will also grow as manufacturers of devices such as video games include chips to connect them to the same networks as mobile phones.
BIDDING WAR? Atheros shareholders will get $45 a share, a 22 percent premium to the stock's closing price on Monday, before talk of a takeover began to circulate. Analysts said the size of the premium leaves room for another bidder to emerge.
Intel Corp and Marvell Technology Group Ltd are potential suitors, said Roth Capital analyst Arnab Chanda.
"If you look at the purchase price, it is clear there were not multiple bidders," Chanda said.
Atheros shares traded below Qualcomm's offer at $44.53, suggesting investors were not holding out hope for a better offer.
Atheros is the No. 2 maker of WiFi chipsets, claiming 21 percent of that market last year, according to data from ABI Research. It was behind Broadcom, which commanded 26 percent of the market, which ABI estimates was worth some $2.6 billion.
Acquiring Atheros will help Qualcomm cement relationships with new customers.
Atheros' two biggest customers are Hon Hai Precision Industry Co Ltd , which builds Mac computers and iPhones for Apple Inc , and Nintendo Co Ltd , according to its most recent annual report. Others include Dell Inc , Hewlett-Packard Co and Microsoft Corp.
Qualcomm, by comparison, lists its two biggest customers as mobile phone giants LG Electronics Inc and Samsung Electronics Co Ltd.
Daniel Amir , an analyst with Lazard Capital Markets , pointed to three positives in the deal for Qualcomm: It could become a "big combo chip player in the handset or tablet" market; it gets access to Atheros' strong customer lineup; it quickly gets a shot to expand into new markets, including home networking.
Still, Amir said in a research note: "We recommend taking money off the table. With the shares trading at close to the $45 potential bid, the stock price has surpassed our fair value price target.
"We believe the risk-reward is balanced at these levels -- this is not a judgment on the quality of the bid. We are aware that there is potential for a bidding war if others make an offer and we may even see an offer of (around) $50."
In afternoon trading on Wednesday, Atheros shares were up 46 cents to $44.46 and Qualcomm shares rose $1.07 to $52.04.
Based on 71.6 million outstanding Atheros shares as of Oct. 20, the acquisition is worth $3.2 billion.
Qualcomm said the "enterprise value" of the transaction, or its market capitalization and debt minus cash, is $3.1 billion.
Craig Barratt , Atheros' chief executive, will become president of Qualcomm Networking and Connectivity following the acquisition.
Qualcomm expects the deal to close in the first half of this year and to add "modestly" to earnings per share in its 2012 fiscal year, excluding one-time items.
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