Arris-ola: Arris Diversifies Customer Base with Moto Deal, Ups Patent Portfolio

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One day after Arris announced its plan to acquire Motorola Home for $2.35bln, shares of the vendor rose, closing up nearly 3.6%. Cable should be happy to have Google out of its hair, with familiar face Arris buying the Google set-top unit for $2.05bln in cash and approx $300mln in newly issued Arris shares. And Arris is happy to not only gain the assets, but diversify its customer base. Comcast and Time Warner Cable, Arris' top 2 customers, make up more than 50% of its revenue. When the Motorola Home transaction closes in a few months, 5 customers will comprise about 51% of sales, said Arris chmn/CEO Bob Stanzione. Moto's client base includes Cablevision, Charter, AT&T, Verizon, Cox, Liberty Global, TWC and Comcast. One analyst called the price high. “We had previously expected a purchase price in the range of $1bln to $1.5bln,” said Jefferies analyst James Kisne in a research report. “From our perspective, the valuation implied by Arris' purchase price is a bit rich given that the assets contain a significant chunk of legacy set-top box revenue that is potentially declining and likely faces margin pressure as set-top box hardware is increasingly commoditized,” he said. Zacks Investment Research expects the company will become a dominant CMTS player behind Cisco. The bottom line, according Zacks, is acquiring the set-top box unit makes sense for Arris as it will have access to Motorola's wider market and expanded customer base. No decisions have been made on personnel, functions or facilities at this early stage in the game. Arris is headquartered outside Atlanta in Suwanee, GA, and has about 2100 employees. In June, former Charter CTO Marwan Fawaz was brought in to head the Home Business following Dan Moloney's departure. His hiring was viewed by some as an attempt to calm MSOs that reportedly didn't want Google near its business. Whether he'll stay on remains to be seen. During a conference call with analysts late Wed, Fawaz and Stanzione stressed that the set-top business isn't dying. “There is going to be an evolution to a new wave of set-tops that can carry both IP and MPEG traffic,” said Stanzione, who said the name needs to change from set-tops to in-home devices. Fawaz expanded on that, saying he believes OTT entertainment ( Netflix, Hulu, etc) will be highly integrated with service providers, who will continue to play a key role in content delivery. “In-home devices are increasing, not decreasing,” he said. The deal also gives Arris licensing to a wide array of Motorola Mobility patents, as well as increasing its patent portfolio. Stanzione pegged the combined portfolio of Arris and Moto Home at about 2K granted and in-process patents. The deal also includes a cap to potential liability from currently pending patent lawsuits, including pending TiVo litigation (jury selection is set to being in late Apr). While no number was given, Arris execs stressed several times during the conference call that Arris' liability was low with Google on the hook. “Google has taken that risk of the table,” Stanzione said. As for potential overlap with Motorola Home's businesses, the Arris CEO said, “we don't anticipate exiting any product lines.” Not everyone's sure about that. “We would not be surprised if after some time, Arris eliminates overlapping products and/or exits non-core products that contribute modestly to sales,” said Raymond James analysts, noting that Moto's business generates just over 2x the sales of Arris. The analysts maintained an “outperform” on Arris and are positive on the deal, but acknowledged the incremental risks from an additional $2bln in debt and $300mln in additional shares.

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