Harmonic Inc. (Nasdaq: HLIT) has agreed to acquire the IP video networking software business of Entone Inc. for $45 million in cash and stock, the two companies said Tuesday. (See Harmonic Buys Into Entone.)

The Entone portfolio includes software components that process and provision personalized video services like video on demand (VOD), in-network personal video recording (nPVR), time-shifted television, and targeted advertisement insertion.

Sunnyvale, Calif.-based Harmonic says it will combine the Entone software with its own video headend and access network gear and sell the integrated package to cable, satellite, and telco/IPTV video operators. (See Harmonic Adds MPEG-4 Encoder and Harmonic Unveils New Gateway.) Harmonic's headend gear consists of integrated video receiver/decoders, encoders, and stream processing systems. Its access products consist mainly of optical transmission products and node platforms.

"Today a lot of services are focused on VOD, but the next generation of products will focus on nPVR and time-shifted video," explains Harmonic spokeswoman Sarah Lum. Lum says that, while Entone's software addresses all of Harmonic's target markets, the acquisition may prove especially useful in strengthening Harmonic's foothold in the growing telco TV sector.

San Mateo-based Entone will now devote its time and money to its customer premises equipment (CPE) business. That portfolio includes residential gateways and set-top boxes with DVR and home networking capabilities. (See Entone Thinks Outside the Home.)

Entone says it has more than 35 VOD deployments, including one at PCCW Ltd. (NYSE: PCW; Hong Kong: 0008), which Entone says is the largest IPTV operator in the world. (See Entone Scores IPTV Win.)

Under the agreed-upon terms, Harmonic will pay Entone $26 million in cash as well as approximately 3.54 million shares of Harmonic common stock. Harmonic will assume “certain liabilities” of $1.5 million in Entone debt, and will invest $2.5 million (in the form of a convertible note) in Entone’s CPE business. That business will be spun out to Entone’s existing stockholders immediately before the acquisition closes.

Harmonic has the money for the buy, but revenues haven't been strong this year. During the first six months of 2006, Harmonic reported revenues of $109.4 million, a decrease of 17 percent compared to its $132.6 million in sales during the first six months of 2005. (See Harmonic Reports Q2.) In its SEC filings, the company blames its sales slump on "supply chain constraints" and an international customer's foot-dragging.

The sale of the Entone software portfolio is expected to close in October 2006.

Harmonic shares were down $0.02 (0.36%) to $5.59 in late afternoon trading on Tuesday.

— Mark Sullivan, Reporter, Light Reading