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Arris Gets EGT for a Song

Jeff Baumgartner
9/1/2009
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Arris Group Inc. (Nasdaq: ARRS) went to the bargain bin again Tuesday, putting up $6.5 million to snare the assets of EGT Inc. , an Atlanta-based maker of video encoders and transcoders.

That's a small figure to pay, considering that EGT, which scored an $8.5 million C round in early 2006, is believed to have raised at least $30 million during its nine years as a privately held company. (Sevin Rosen Funds, H.I.G. Ventures, Gray Ventures, and Noro-Moseley Partners have been among EGT's investors.)

The deal allows Arris to continue the expansion of its digital video portfolio and puts it into heavier competition with encoding rivals such as Motorola Inc. (NYSE: MOT), Cisco Systems Inc. (Nasdaq: CSCO), Harmonic Inc. (Nasdaq: HLIT), and Tandberg Television .

Under terms of the agreement, Arris takes over four EGT encoding lines (Encore, Quartet, VIPr, and an edge device called the HEMi) as well as EGT's patent portfolio. As many as 25 EGT employees will move over to Arris, which is also based in the Atlanta area. Arris declined to say if any individuals from EGT's executive team will be making the move.

Wedge Partners Corp. analyst Brian Coyne says the buy helps to round out Arris's video product line ahead of cable's growing focus on network-based DVRs and other advanced video services that require more streaming and storage capacity.

"The deal gives [Arris] valuable video processing technology to match up with its D5 edge QAM platform, and brings the company into even more direct competition with Harmonic, at least from a product standpoint, even though EGT's encoder market penetration is a fraction of HLIT's." he noted.

Historically, EGT's customers have been of the Tier 2 and Tier 3 variety. Although it did notch Cox Communications Inc. as a customer for a digital simulcast project in Kansas a couple of years ago, others on EGT's customer roster include Bresnan Communications LLC , Advanced Cable Communications, Armstrong Cable , Cable Onda of Panama, and Megacable Comunicaciones of Mexico.

Arris isn't disclosing how much revenue EGT has brought in as of late, but Arris VP of investor relations Jim Bauer believes EGT's products should have an easier time gaining a foothold with bigger MSOs now that they've got Arris's backing.

And it won't take much for Arris to get a return on the deal. "For $6.5 million, you don't have to sell much to make some money off the deal. The bar is set pretty low for them," notes Jeff Heynen, directing analyst for broadband and video at Infonetics Research Inc.

Another Arris bargain
The price paid for EGT's assets follows a trend of M&A frugality at Arris. Last year it paid a sum considered negligible to buy OSS firm Auspice Corp. It also got into the cable modem termination system (CMTS) game in 2002 by putting up just $60 million for Cadant Inc. (by comparison, Motorola paid $300 million for CMTS startup RiverDelta Networks), then followed in 2003 by buying the assets of another cable data firm, Com21 Inc., for $2.8 million. (See Arris Buys Com21 Assets, Gets Docsis 1.1.)

Arris has also been known to fold its cards when the pot's too big. It dropped its pursuit of Tandberg Television when Ericsson AB (Nasdaq: ERIC) trumped it with a rival bid of $1.4 billion. Arris later put up $730 million to purchase C-COR Corp., a deal that expanded Arris's OSS product line and got it into the video-on-demand (VoD) business. Arris has also expanded its video portfolio in other ways, recently signing a partnership with Jim Dolce's new baby, Verivue Inc. , maker of next-gen Flash-based media switches. (See Arris Absorbs Auspice Assets, Ericsson Offers $1.4B for Tandberg TV, Arris Acquires C-COR, and Arris Pumps Up Video With Dolce's Verivue .)

And that strategy has paid off so far. At least from a cable perspective, "Arris obtained the same kind of technology they would've gotten with Tandberg TV, but without the [customer] footprint," Heynen says.

— Jeff Baumgartner, Site Editor, Cable Digital News




Interested in learning more on this topic? Then come to TelcoTV 2009, the telecom industry’s premier event for the exploration of a comprehensive entertainment convergence strategy, to be staged in Orlando, Fla., November 10-12. For more information, or to register, click here.


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