Arris Takes a Dive
Shares in Arris Group Inc. (Nasdaq: ARRS) are down this week, but it's not just because of the $730 million deal to acquire C-COR Corp. (Nasdaq: CCBL). (See Arris Bids $730M for C-COR.)
The decline appears to be more about news that Arris will miss its earnings estimates for the third quarter.
During Monday's conference call to discuss C-COR, Arris execs mentioned that non-GAAP earnings per share could come in a penny or two below their forecast of 21 cents to 24 cents. The company attributed that in part to some late orders of cable modem termination systems (CMTSs) and a sales mix weighted in favor of lower-margin embedded multimedia terminal adapters (E-MTAs).
"Management also sounded incrementally cautious on operator spending for 4Q, though it indicated that RGU [revenue generating unit] growth trends remain strong, especially around VOIP," Thomas Weisel Partners analyst Jason Ader wrote in a research note.
Arris also said third-quarter revenue should fall in the previously predicted range of $253 million to $263 million.
On Monday, Arris stock fell $2.28 (16%) to $11.98, while C-COR shares climbed $2.14 (21.7%) to $12.02.
Arris's bleeding slowed considerably Tuesday, with shares down 44 cents (3.7%) at $11.54. C-COR stock also came back to earth Tuesday -- down 74 cents (6.2%) to $11.28 per share.
Earnings issues aside, analyst reaction to the C-COR deal has been mixed, with some minor expectation that a rival bid for the State College, Pa.-based company could emerge.
"While [C-COR] would not have been our first choice due to customer overlap and modest growth prospects, it makes strategic sense for [Arris] to gain more scale and product diversity and enhance its gross margin profile," noted Ader, who lowered his price target on Arris stock to $18 from $20.
ThinkEquity LLC analyst Anton Wahlman likewise reduced his 12-month target to $15 from $20.
Wahlman agreed that the proposed C-COR deal "makes a lot of sense," as it will strengthen Arris against the likes of Cisco Systems Inc. (Nasdaq: CSCO) and Motorola Inc. (NYSE: MOT). "But [we] believe the price paid is at least close to a full price, causing some valuation concern," he wrote.
The deal comes with a break-up fee of $22.5 million, although Wahlman believes C-COR can cancel the deal for free if Arris's stock price drops below $11.41.
If it reaches that point, Wahlman said he "would not be surprised to see a competitive bidder such as Ericsson AB (Nasdaq: ERIC) emerge and propose better terms for C-COR."
If that were to happen, expect Arris to remove Ericsson from its Christmas card list posthaste, as it was Ericsson that swooped in with a bid to beat Arris's offer for Tandberg Television . (See Tandberg Board Backs Ericsson Bid .)
C-COR Chairman and CEO David Woodle noted he vetted a number of strategic options for the company. "And we thought this [Arris deal] was the best," he said. (See Arris Takes 'Giant Leap Forward'.)
Morgan Keegan & Company Inc. analyst Simon Leopold maintained his "Outperform" rating on Arris. "Management may have sounded a bit more cautious regarding near-term trends, yet remains bullish on the longer term outlook," he said.
While unaware of any potential counter-bids, "this remains a possibility," he added.
— Jeff Baumgartner, Site Editor, Cable Digital News
The decline appears to be more about news that Arris will miss its earnings estimates for the third quarter.
During Monday's conference call to discuss C-COR, Arris execs mentioned that non-GAAP earnings per share could come in a penny or two below their forecast of 21 cents to 24 cents. The company attributed that in part to some late orders of cable modem termination systems (CMTSs) and a sales mix weighted in favor of lower-margin embedded multimedia terminal adapters (E-MTAs).
"Management also sounded incrementally cautious on operator spending for 4Q, though it indicated that RGU [revenue generating unit] growth trends remain strong, especially around VOIP," Thomas Weisel Partners analyst Jason Ader wrote in a research note.
Arris also said third-quarter revenue should fall in the previously predicted range of $253 million to $263 million.
On Monday, Arris stock fell $2.28 (16%) to $11.98, while C-COR shares climbed $2.14 (21.7%) to $12.02.
Arris's bleeding slowed considerably Tuesday, with shares down 44 cents (3.7%) at $11.54. C-COR stock also came back to earth Tuesday -- down 74 cents (6.2%) to $11.28 per share.
Earnings issues aside, analyst reaction to the C-COR deal has been mixed, with some minor expectation that a rival bid for the State College, Pa.-based company could emerge.
"While [C-COR] would not have been our first choice due to customer overlap and modest growth prospects, it makes strategic sense for [Arris] to gain more scale and product diversity and enhance its gross margin profile," noted Ader, who lowered his price target on Arris stock to $18 from $20.
ThinkEquity LLC analyst Anton Wahlman likewise reduced his 12-month target to $15 from $20.
Wahlman agreed that the proposed C-COR deal "makes a lot of sense," as it will strengthen Arris against the likes of Cisco Systems Inc. (Nasdaq: CSCO) and Motorola Inc. (NYSE: MOT). "But [we] believe the price paid is at least close to a full price, causing some valuation concern," he wrote.
The deal comes with a break-up fee of $22.5 million, although Wahlman believes C-COR can cancel the deal for free if Arris's stock price drops below $11.41.
If it reaches that point, Wahlman said he "would not be surprised to see a competitive bidder such as Ericsson AB (Nasdaq: ERIC) emerge and propose better terms for C-COR."
If that were to happen, expect Arris to remove Ericsson from its Christmas card list posthaste, as it was Ericsson that swooped in with a bid to beat Arris's offer for Tandberg Television . (See Tandberg Board Backs Ericsson Bid .)
C-COR Chairman and CEO David Woodle noted he vetted a number of strategic options for the company. "And we thought this [Arris deal] was the best," he said. (See Arris Takes 'Giant Leap Forward'.)
Morgan Keegan & Company Inc. analyst Simon Leopold maintained his "Outperform" rating on Arris. "Management may have sounded a bit more cautious regarding near-term trends, yet remains bullish on the longer term outlook," he said.
While unaware of any potential counter-bids, "this remains a possibility," he added.
— Jeff Baumgartner, Site Editor, Cable Digital News

deauxfaux
12/5/2012 | 3:01:54 PM
re: Arris Takes a Dive
The CCor deal seems ill conceived to say the least and smacks of desperation.
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UberNeoCon
12/5/2012 | 3:01:54 PM
re: Arris Takes a Dive
Than is indicated. This company is headed toward oblivion
UberNeoCon
12/5/2012 | 3:01:51 PM
re: Arris Takes a Dive
Ill conceived or not, somehow the deal got done...makes you wonder whether the lights are on, or anyone is home on the board
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