The Ruckus acquisition is a big bet for Arris but CEO Bruce McClelland is confident about the strategic opportunities.

Mari Silbey, Senior Editor, Cable/Video

February 24, 2017

7 Min Read
Is Ruckus Right for Arris?

Arris, in case you hadn't noticed, is not a company that shies away from major acquisitions.

After buying Motorola Home in 2013 for $2.35 billion and closing on the acquisition of Pace for $2.1 billion just over a year ago, Arris Group Inc. (Nasdaq: ARRS) announced this week that it intends to buy Ruckus Wireless (and the ICX Switch business) from Brocade Communications Systems Inc. (Nasdaq: BRCD), the current owner, pending the successful sale of the rest of Brocade to Broadcom Corp. (Nasdaq: BRCM) in late spring or early summer. Arris will pay $800 million in cash for the assets plus some additional money for the payout of employee stock awards. (See Arris Bags Ruckus Assets in $800M Deal.)

So far, reactions to the acquisition have been mixed. Arris's stock price took a dive immediately after the announcement, but the company had also just released a weaker-than-expected forecast for the coming quarter.

More telling of the market's reaction may be the concern that Jeffries analyst George Notter articulated in a research note following the news release. Notter points out that Arris is taking a risk with the purchase on two fronts.

"We think this might be an example of an M&A deal that moves a business into a new technology area and into a new customer base. In our experience, this isn't usually a recipe for a successful M&A deal," says Notter.

Arris is also still barely over the hump of integrating its Pace acquisition, meaning that just as the company is settling down after that culture shock, there's a new integration challenge to contend with.

However, despite some pessimism from industry observers, there are also plenty of reasons why the deal with Brocade makes strategic sense. As Arris CEO Bruce McClelland points out, the service provider industry is evolving, and Arris has to move quickly if it wants to keep up.

"[It's] our view that the industry's going to evolve a lot and transform over the next three to five years, and ultimately everyone becomes a wireless or mobile operator in some form or fashion," says McClelland. "And while we're greatly positioned from a residential, in-home perspective for WiFi, we have not invested in the broader macro or small cell technology and outdoor venue WiFi, etcetera."

McClelland is nothing if not enthusiastic about Ruckus and its global potential: "I think they just have the best wireless products on the planet, so it was a very a logical move for us, as we see the shift in our core customer base in this direction, to find a path to work together."

Figure 1: Arris CEO Bruce McClelland has big plans for small cells. Arris CEO Bruce McClelland has big plans for small cells.

The Ruckus product portfolio
Ruckus brings a number of products to the table. These include WiFi software and services offerings, wireless LAN controllers and numerous wireless access points; all alongside the ICX switching business Arris is also picking up in the deal. Arris is also adding about 1,600 new employees to its roster, many of whom have expertise in areas Arris currently lacks.

Particularly interesting from a technology perspective is the development work Ruckus has done around neutral host LTE infrastructure. In short, Ruckus is creating small cells that operate across multiple spectrum bands. A single piece of hardware can extend indoor cellular connectivity for customers getting service from all of the major wireless carriers. It's a cost-effective approach for improving connectivity in shared indoor spaces -- office buildings, hotels, malls, etc. -- and Ruckus, of course, claims to be a pioneer in the area. Even better, the Ruckus solution works with its existing cloud-based management platform for WiFi infrastructure, meaning the new small cell technology is designed to be an easy add-on for anyone using Ruckus's WiFi tech.

Alongside the company's technology, Ruckus also brings with it new access to the enterprise market. Ruckus already has major enterprise customers in the hospitality, education, sports and entertainment, retail, warehousing, transportation and smart cities arenas. This is new territory for Arris and should prove useful not only for the continued sale of WiFi solutions, but also as a channel for future wireless products.

Next page: Execution is everything

Execution is everything
The big question of course, is what will Arris do with its new assets?

According to McClelland, one of the first moves Arris is considering is taking the Ruckus WiFi "magic sauce" and integrating it into existing Arris customer premises equipment; products like the wireless gateways and set-tops that Arris sells to service providers.

However, McClelland also wants to use Ruckus's expertise to build new wireless capabilities into Arris's fiber infrastructure products, a move that puts the company on a direct collision path with other traditional cellular vendors.

"We're going to be right in the sweet spot of where the whole wireless space is from a vendor perspective, but we're going to be coming at it from a very disruptive technology approach, and probably a disruptive economic approach," says McClelland. "This is not big expensive towers with big expensive radios. It's an enterprise approach to the solution. So I like our chances there as far as being a disruptive force in how the networks evolve over the next few years."

This is a big bet in the service provider business, and not just for consumer sales, but for securing the enterprise customers that network operators want to attract. Cable companies in particular are investing heavily in commercial services as an avenue for growth. (See Moffett: Business Services Critical to Cable Growth.)

McClelland believes Arris can not only use Ruckus's technology to gain a share of that business, but also Ruckus's existing enterprise sales channels.

"If you talk to all of our current customers today, one of the most important parts of their business is the growth in their enterprise segment, their B2B offering as they extend their broadband service, their video service into businesses," says McClelland. "And what they're looking for from technology partners like us is for us to collaborate with them both from a product perspective... but also have us be a channel for them where we're bringing them enterprise customers... And so I really believe that the network of channels to enterprise is going to be a real value-add for our service provider customers."

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Meanwhile, on the direct-to-enterprise customer side, McClelland says that Arris will make the most of the employee teams that Ruckus brings with it as part of the acquisition. Since Arris has virtually no experience in the enterprise space, the plan is to operate that part of the Ruckus business independently within the company.

"The Ruckus team and the Brocade team that's coming to us are experts in building that business, that channel, and we're going to really leverage that, as opposed to integrate it and smash it into everything we have," says McClelland. "We're going to nurture that as a separate line of business within the company and really make that successful."

That strategy may help assuage some of Wall Street's concerns about Arris extending itself into entirely new territory.

Reading the financial tea leaves
Financially, it's hard to judge from today's vantage point whether Arris's deal for Ruckus is a winner. On the one hand, there were rumors before the acquisition announcement that the Ruckus assets could sell for as much as $1 billion, and looking back to last April, Brocade bought Ruckus Wireless for $1.2 billion. On paper, $800 million sounds like a discount.

On the other hand, Jeffries points out that the cost of the deal is still likely eight times what Ruckus will bring in annually in earnings before interest, tax, depreciation and amortization (EBITDA).

Unsurprisingly, McClelland favors a positive interpretation of the deal, saying that he thinks "both parties won in this deal, given that we were able to buy a business and a team." He adds, "value is in the eye of the beholder," and Arris sees a lot of value in Ruckus.

— Mari Silbey, Senior Editor, Cable/Video, Light Reading

About the Author(s)

Mari Silbey

Senior Editor, Cable/Video

Mari Silbey is a senior editor covering broadband infrastructure, video delivery, smart cities and all things cable. Previously, she worked independently for nearly a decade, contributing to trade publications, authoring custom research reports and consulting for a variety of corporate and association clients. Among her storied (and sometimes dubious) achievements, Mari launched the corporate blog for Motorola's Home division way back in 2007, ran a content development program for Limelight Networks and did her best to entertain the video nerd masses as a long-time columnist for the media blog Zatz Not Funny. She is based in Washington, D.C.

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