Moto & Cisco Joust for Terayon
LR Cable News Analysis Alan Breznick, Cable/Video Practice Leader, Light Reading 2/15/2007
Several industry sources say the Terayon board is weighing competing offers for the digital video equipment supplier from Motorola, Cisco Systems Inc. (Nasdaq: CSCO), and Harmonic Inc. (Nasdaq: HLIT). Barring any last-minute holdups, sources expect the board to make its decision within the next week or two.
As expected, a fourth would-be suitor, Arris Group Inc. (Nasdaq: ARRS), has dropped out of the Terayon bidding contest after snatching a much larger catch, Tandberg Television , from the clutches of such rivals as Motorola. In a deal announced last month, Arris agreed to pay $1.2 billion for Tandberg TV, outbidding Moto and other competitors. (See Arris Pounces on Tandberg TV.)
Industry sources say the winner could pay as much as $250 million for Terayon, based on a valuation of up to $3 per outstanding share. That price could conceivably go even higher if a new bidding war erupts and the suitors decide to up the ante.
"There's precedent for it," says Brian Coyne, an analyst at Friedman, Billings, Ramsey & Co. "We've seen Cisco and Moto pay up for other assets."
What might be holding up a quick deal? Sources say it could be the desire by two top Terayon executives, CEO Jerry Chase and CFO Mark Richman, to negotiate optimal severance packages. Both officials already have generous payments stipulated in their employment contracts should the company change hands.
A Terayon spokesman declined comments on reports of a pending sale. In a prepared statement, the company said it holds board meetings regularly and doesn't comment on what happens at them.
Sources generally see Motorola as the favorite candidate to win Terayon because of its hefty cash holdings, strong desire to bolster its digital video technology portfolio, and aggressively acquisitive ways. It's also believed that Moto executives may feel they need Terayon more than their Cisco counterparts do.
In a research report on the Terayon auction earlier this week, ThinkEquity LLC analysts Anton Wahlman and Eric Kainer laid out the case for a purchase by each of the three suitors. But they particularly stressed the benefits for Motorola.
"In order to protect itself, and keep this property away from arch-enemy Cisco, we believe Motorola is the most motivated party to acquire Terayon," they wrote.
Some sources, however, think that Cisco could still end up the victor. Despite a supposed lack of enthusiasm at Cisco headquarters in San Jose, Calif., they cite strong interest in Terayon from the networking giant's Scientific Atlanta division.
"Don't bet against Cisco," says one source. "Those guys are really looking to nail down the total portfolio."
Industry observers agree that Harmonic, by far the smallest of the three bidders, needs Terayon more than either Moto or Cisco. But they don't see Harmonic summoning up enough cash to outbid the two tech giants.
"Harmonic needs to do something, but they can't outbid Motorola," says another source.
Despite a spotty financial record, a raft of lawsuits against the company, and a still-pending SEC probe into accounting practices, Terayon remains an attractive takeover target largely because of its popular line of CherryPicker digital video processing products.
Terayon's digital video solutions products -- which include the CherryPicker line of grooming, rate-shaping, statistical multiplexing, and ad insertion equipment -- contributed $42.3 million of the company's $58.7 million in total revenues over the first three quarters of 2006. In its last financial report, the company estimated that its digital video solutions unit produced another $16.2 million to $17.2 million in revenues during the fall.
"The gross margins on the Terayon business are fantastic," says one source, calculating the margins to be 69.1 percent last quarter. "It's a good business. But it's a product line, not a publicly owned business."
Industry analysts also see Terayon as valuable because of its high gross margins, healthy cash balance, and sizable net operating losses, which could be used by an acquirer to offset other profits and cut tax bills.
— Alan Breznick, Site Editor, Cable Digital News