CommScope and Arris have played up the strategic rationale of their proposed marriage as a way to combine their expertise in areas such as unlicensed and licensed spectrum amid the dawn of the 5G era.

But in the wake of the deal, announced on November 8, an analyst who keeps tabs on both companies arrived at a different conclusion based on the reaction of investors in CommScope Inc. and Arris Group Inc. (Nasdaq: ARRS). (See Why CommScope Wooed Arris and CommScope Puts Up $7.4B for Arris.)

"The deal seemed to lack strategic rationale and was more about buying cash flow," Raymond James Financial Inc. (NYSE: RJF) analyst Simon Leopold said in a research note that summed up those reactions.

"Like the Broadcom acquisition of Computer Associates, CommScope is acquiring strong cash flow. This is more of a financial transaction than a strategic one," he added. (See Broadcom Buys CA – Huh?)

One issue, he said, is that CommScope's shareholders have a negative perception of Arris as "just a set-top box (STB) company," and apparently don't know as much about Arris's position in the network and infrastructure markets. Though STBs represent about 40% of sales at Arris, the products aren't terribly profitable (in the neighborhood of single digit percentages).

Though complementary wireless/mobile products and a focus on the emerging CBRS market are viewed as a key driver of the deal by the companies, Leopold noted that Arris's angle there, via its Ruckus acquisition, provides about 10% of sales. (See Arris Bags Ruckus Assets in $800M Deal and Proposed CBRS Rules Suit Cable's Cause.)

Among other investor reactions, Leopold said some didn't expect The Carlyle Group LLC 's involvement (it's investing $1 billion into the combined company, good for a stake of roughly 16%), and view that as "smart money." Meanwhile, Arris investors believe that "CommScope underpaid but rationalized the deal," and that management there perhaps had reason to believe that 2019 presented greater than appreciated challenges. (See Arris: Tariffs Add $200M in Broadband Gear Costs, Threaten US 5G Plans.)

CommScope's share price took a 25% haircut in the wake of the deal, but Leopold believes that the company's poor Q3 results and lowered Q4 outlook played a larger role in the stock sell-off. (See Is Arris the Answer to CommScope's Pain?)

— Jeff Baumgartner, Senior Editor, Light Reading