Atheros Is Learning New Tricks

You can teach an old dog new tricks! They can even learn profitable skills.

Atheros Communications (Nasdaq: ATHR  ) , for example, is picking up a new ability. Atheros is an expert in wireless networking, and also dabbles in wired data links like Ethernet controllers. And now the company will fold in the powerline networking products of Intellon (Nasdaq: ITLN  ) in a deal that amounts to $181 million in cash and stock once you back out Intellon's $62 million of debt-free cash.

A deal like this would barely be worth mentioning if the buyer was a well-heeled and diverse giant like Texas Instruments (NYSE: TXN  ) or Analog Devices (NYSE: ADI  ) , but Atheros is small and obscure enough that it's an official Hidden Gems recommendation. Intellon shareholders get to pick whether they want to exchange their shares for 100% cash, all Atheros stock, or half and half.

An all-cash deal would strain the day-to-day operating budget of little Atheros. The Intellon buyout would gobble up more than half of Atheros' $340 million of cash equivalents and short-term investments. Management expects to issue between 4.2 million and 5.1 million new shares to settle the affair, which means diluting Atheros' stock by 6% to 8%.

I think it's a smart buy and well worth the price. The dilution will hurt at first, but having Intellon's technology on board opens up new markets and product possibilities. Powerline networking features will be baked into Atheros' lines of wireless and Ethernet communications chips.

Wireless networking is very handy, but it’s also vulnerable to many problems, including interference from other wireless signals and getting blocked by thick walls or metal objects -- and don't forget to encrypt your signals if you don’t want to share your network with the neighbors. Powerline signals stay in your house, providing reliable speeds nearly on par with traditional Ethernet cables but without pulling new cables around the house.

Atheros expects the Intellon deal to be profitable as early as next year, and both companies produce positive cash flows today. Give Atheros some time to close the deal and then integrate Intellon's technologies into its own products, and I think we should see retail products on store shelves by 2011.

With a very impressive customer list that includes network service providers like Verizon (NYSE: VZ  ) , retail networking specialists like Netgear (Nasdaq: NTGR  ) , and video game console builders, Atheros will sneak powerline networking into our homes before you know it. From there, it should be easy to make the new feature a real selling point that sets Atheros apart from rivals like Broadcom (Nasdaq: BRCM  ) .

Like I said, I believe this is a smart move that will end up enriching both Atheros and its shareholders in short order. Do you agree? Disagree? Let me know in the comments below.