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Arris Swings for the Fences

Jeff Baumgartner
12/20/2012
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11:00 AM -- I was not surprised that Arris Group Inc. emerged as the top bidder for Motorola Home, but I was shocked to learn that it put up $2.35 billion in cash and stock -- near the top of the $1.5 billion-to-$2.5 billion range that Google was expected to fetch for the maker of set-tops, video software and access gear.

After all, this is the same Arris that took its toys and went home when Ericsson AB upped the ante for Tandberg Television. This is the same Arris that paid $60 million for a cable modem termination system (CMTS) startup called Cadant Inc. in 2002, when, just two years earlier, ADC set the market by acquiring a similar startup, Broadband Access Systems, in a stock deal valued at a nutty $2.25 billion at the time. Arris nabbed video processing startup EGT Inc. for a song in 2009. It timed its purchase of BigBand Networks Inc. when the switched digital video (SDV) specialist was scuffling.

So, there's ample evidence that paying top dollar is not the Arris way. It's been known as a careful but shrewd deal-maker, content on taking walks, hitting singles and scoring the occasional double. This week it grabbed Wonderboy off the rack and took a glorious swing for the bleachers.

Arris Chairman and CEO Bob Stanzione didn't let this once-in-a-career, future-altering opportunity pass him by. He unblinkingly went all out to a strike a deal that's not only poised to remove Arris from the long shadows of Cisco Systems Inc. and give it a legitimate shot at becoming a global broadband and video powerhouse, but also to cement Stanzione's legacy.

But we don't know yet how that legacy will play out. The challenges ahead are not anywhere near as small as the deal is large for Arris.

Arris has acquired plenty of companies over the years, but nothing like this. It's now tasked with swallowing one that's more than twice its size, while also taking on nearly $2 billion in loans.

And, despite the talk about "synergies" between the two companies, there are some significant product overlaps that Arris will have to sort through. On Wednesday night's call, Stanzione stressed that Arris doesn't plan to exit any businesses. But it would seem likely that Arris will have to think about selling off the redundant pieces or pitching them altogether. It simply can't swallow Motorola Home whole.

There's going to be an unavoidable shakeout that will involve both people and products. That planning process, Stanzione said, gets under way this morning.

And, if Arris can execute the integration properly, there are good things that could come of the deal. Arris, for example, thinks it can achieve $100 million to $125 million in annual cost synergies.

And it could address one of Arris's historic shortcomings -- its reliance on Comcast Corp. and Time Warner Cable Inc., which accounted for about 50 percent of sales in the most recent quarter. If just one of them sneezes, Arris catches pneumonia, as the saying goes.

That vulnerability shrinks significantly with Motorola Home. Comcast and TW Cable are also the two largest customers of Motorola Home. But, together, Arris and Motorola Home will enjoy a much more diverse customer base that includes a better mix of cable operators and telco customers, with their top five combined customers representing 51 percent of revenues.

Like any acquisition, this one comes with the potential for risks and rewards, amplified by the relative size of Arris's latest prize. Stanzione and Co. did what it took to get the deal. Ahead comes the hard part -- making it work.

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— Jeff Baumgartner, Site Editor, Light Reading Cable

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