Market Insight

Arris to acquire Motorola Home division from Google

December 20, 2012

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US network equipment maker Arris has won a bid to acquire Motorola Home from Google for $2.35b. The Home division is part of the Motorola Mobility business that Google took control of in May 2012 for $12.5b, and has long expected to be the first resale of assets from a purchase made primarily for the mobile phone related patent portfolio. Motorola Home is a major global vendor of set-top boxes, modems and routers, and network infrastructure for video and internet over cable.

The purchase will involve Arris borrowing over $2b to fund the deal (mostly from Bank of America Merrill Lynch and Royal Bank of Canada), and will result in Google owning around 16 per cent of the combined entity upon completion, valued at around $260m at close of trading prior to the announcement.

In 2011 Arris reported revenue of $1.1b while Motorola Home turned-over $3.5b. The combined company will be one of the largest set-top box and operator modem providers in the world, and one of the largest network infrastructure providers, particularly for video and cable internet equipment. The deal will also offer Arris license to Motorola Mobility patents, increasing the company's patent portfolio.

There had been growing speculation about the timing of the divestiture of Motorola Home, culminating in a public bid by set-top box maker Pace on 10 December 2012. As the only public bidder prior to the announced acquisition by Arris, Pace may appear to have missed out on a major opportunity. While Motorola Home is a major prize, it is a costly acquisition for any company in the industry. For Pace, the opportunity to move strongly into the infrastructure and cloud services industry has been trumped by Arris' desire to consolidate around US cable and capture volume in the set-top box industry.

Regardless of the winning bidder, this is further evidence of the convergence of IP and broadcast, and the consolidation of the video technology industry across infrastructure and in-home consumer equipment. Arris is one of the major established US cable infrastructure providers and has built a strong business competing with Cisco and Motorola for products such as CMTS, encoders and cable headend equipment. However, Arris has struggled to make a major impact in the lucrative US cable set-top box market.

In 2009, Arris purchased Digeo (including the Moxi branded division) an early provider of advanced search, DVR and other multimedia home gateway (MHG) functions. The intention was to help Arris navigate from a primarily IT and cable services business towards providing key elements of the video ecosystem. In 2011 this strategy was further consolidated through the purchase of BigBand Networks, a key provider to the US cable industry of switched digital video (SDV), video-on-demand (VOD), IPTV, edge and CMTS equipment. Even following these acquisitions Arris has not managed to compete strongly in the set-top box market, either in the US or abroad, with deals limited to Canada's Shaw Communications and 11 smaller tier 2 and 3 US cable operators and primarily at the high-end with MHGs. By contrast, Motorola has not managed to deploy a MHG yet, but has a much larger stable of operators, a high-volume set-top business, strong sales outside of the US and proven deployments of technologies important for multiscreen distribution, including live set-top box transcoding and DRM.

The deal represents a significant consolidation of the US cable IP and video revenue for both consumer CPE and infrastructure. The combination of Arris and Motorola Home will have sales of close to $4.6b using 2011 figures, eclipsing revenues of Cisco's $3.9b (at 85 per cent of the size) Service Provider Video segment, which includes the STB, Broadband CPE, CMTS, Videoscape, and video headend equipment. The set-top box business will be primarily borne out of Motorola, which shipped 17.4m units in 2011, worth $2.3b. In revenue terms, Arris would inherit the market lead in the set-top box business, competing directly with Cisco, Echostar, Pace and Samsung as the largest five vendors.

It is worth contrasting this deal with Cisco's recent purchase of security and software provider NDS. At $5b the deal was more than twice the value for a business generating around one-third of the revenue. While NDS was sold at approximately five times its 2011 revenue, Motorola Home, which is a profitable business unit sold for just two-thirds of its 2011 revenue. On a smaller scale but also relevant, is IPTV software vendor Espial's Novemeber 2012 purchase of its loss making rival ANT. This deal was worth just £5m but still represented a 10 per cent premium on ANT's 2011 turnover. Motorola Home's valuation is an indication not only of the lack of buyers available for this scale of business and Google's need to divest, but also about the relative interest in the industry in investing in software/services/security versus heavy infrastructure and CPE at this time.

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