UPDATE 3-Nvidia to buy phone chipmaker Icera for $367 mln

Mon May 9, 2011 1:23pm EDT

* Deal to lower operating profit in first half of 2012

* To add to operating profit in second half of 2012

* Deal to help Nvidia fight Qualcomm, Intel

* Shares up 1.29 percent (Adds detail and background on Nvidia, comments)

By Sinead Carew

NEW YORK, May 9 (Reuters) - Nvidia Corp (NVDA.O) plans to buy privately held cellphone chipmaker Icera for $367 million in cash, stepping up competition against Qualcomm Inc (QCOM.O) and Intel Corp (INTC.O) in the smartphone chip market.

With this deal, Nvidia enters the competitive market for baseband or radio chips, which connect devices to cellular networks. Its shares rose as much as 2.7 percent before giving back some of those gains.

Led by racing-car enthusiast Jen Hsun-Huang, Nvidia vaulted into the mobile chip market this year, going head to head with Qualcomm, Texas Instruments TXN.N and Marvell (MRVL.O).

The maker of graphics chips for PCs grabbed center stage with design wins in tablets and phones using Google's Android platform and made by Samsung Electronics Co (005930.KS), Motorola Mobility (MMI.N) and LG Electronics (066570.KS).

Wall Street has rewarded the Santa Clara, California-based company. Its shares have risen 27 percent since the beginning of the year.

Buying Icera's technology will let Nvidia package its high-end application processors, which enable features like video on smartphones and tablets, with cellphone communications.

Nvidia said Icera could help it double the revenue it can generate from each mobile device.

HOLE IN ITS STRATEGY

Intel, struggling to stake out territory in smartphones and tablets, last year bought German chipmaker Infineon Technologies (IFXGn.DE), AG's wireless unit, for $1.4 billion.

"(Radio chips) seemed like a hole in the strategy to get into mobile for Nvidia," Stifel Nicolas analyst Kevin Cassidy said. "This will put Nvidia on equal footing with Intel and Qualcomm."

But with industry giant Texas Instruments shutting down its low-margin baseband chip business to concentrate on more profitable application processors, some analysts warn that Nvidia will find itself in a tough, commodity market.

"They don't have to come in and take over Qualcomm's No. 1 spot for this to make logical sense," said Cody Acree, an analyst at Williams Financial Group. "But I also caution investors that this is a strategy that has been tried to differing degrees of success and a lot of failures."

While all of Icera's chip sales to date have been to makers of network cards used to connect laptops to the Internet wirelessly, it launched smartphone chips earlier this year.

Icera's customers include Nokia (NOK1V.HE), Chinese mobile device manufacturers Huawei [HWT.UL] and ZTE, 000063.SZ and Samsung.

Nvidia said the deal would slightly lower operating profit in the first half of 2012, but it expects the transaction to add to operating profit in the second half.

But Stifel's Cassidy said he does not expect the deal to hurt Nvidia's profit margins in the long run.

Earlier this year, Qualcomm agreed to buy another smaller wireless radio chipmaker, Atheros ATHR.O, for $3.2 billion. [ID:nN05287795]

Evercore Partners was financial adviser to Icera in the Nvidia deal.

Shares of Nvidia were up 1.29 percent at $19.58 in midday Nasdaq trading after reaching $19.85 earlier in the session. (Additional reporting by Noel Randewich in San Francisco and Himank Sharma in Bangalore. Editing by Robert MacMillan)

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