Motorola, Cisco Bidding for Terayon
LR Cable News Analysis Alan Breznick, Cable/Video Practice Leader, Light Reading 12/11/2006
Several industry sources say Motorola and Cisco are both angling to take out Terayon for an estimated $225 million to $275 million sometime in the next few weeks. Sources say a third, smaller cable equipment manufacturer, Harmonic Inc. (Nasdaq: HLIT), and quite possibly a fourth cable vendor, Arris Group Inc. (Nasdaq: ARRS), are in the hunt for Terayon as well.
Handicapping the odds, some sources see Motorola as the favorite to capture Terayon right now. But Cisco is apparently making a strong bid, too, and both Harmonic and Arris seem serious in their pursuit as well.
Spokesmen for Motorola, Cisco, Arris, Harmonic, and Terayon all declined comment on the reports.
Once a prime player in the cable modem and cable modem termination system (CMTS) businesses before exiting both sectors over the last two years, Terayon is considered a hot property primarily because of its sought-after CherryPicker line of digital video processing products. The Silicon Valley firm supplies key equipment for digital signal grooming, rate shaping, statistical multiplexing, and scrambling, as well as digital simulcasts and digital advertising insertion and splicing, to cable operators, network programmers, broadcasters, phone companies, and other customers.
In the last financial report that the company filed before announcing an accounting review and restatement of several years of earnings releases last year, Terayon said its digital video division generated record sales of $17.3 million in the second quarter of 2005, up from $13.0 million in the first quarter and $7.5 million in the year-ago period. Those figures translate into annualized revenues of at least $60 million for CherryPicker in 2005.
"Clearly, CherryPicker is a product that cable operators see as having a lot of value," says Brian Coyne, an analyst with Friedman Billings Ramsey & Co. Inc. , who declined to comment on the specifics of a potential deal. "It is a very solid technology."
In a report on Terayon earlier this year, Coyne estimated that the company's video products produced $64.1 million in revenues last year. He also projected that the CherryPicker line would generate $82.2 million in revenues this year, or about two thirds of the company's overall sales.
Terayon commands a sizable installed base for upgrades to next-generation digital video technology. For instance, Terayon has installed CherryPicker gear on many Comcast Corp. (Nasdaq: CMCSA, CMCSK) cable systems around the country, among other large MSOs.
In addition, sources say Teryaon is an appealing target to at least some potential suitors because of its large net operating losses, which could be carried forward to offset profits and thus cut corporate tax bills. Before it announced its earnings restatement plans, the company reported cumulative net operating losses of $367 million through the end of 2004.
But any deal is contingent on Terayon finally completing and filing its re-audited financial statements for the last several years. Delisted by the Nasdaq exchange earlier this year because of its accounting problems, Terayon has been struggling since it was hit by shareholder lawsuits over questionable stock sales by its two founders, brothers Zaki and Shlomo Rakib, and other company insiders.
This isn't the first time that Terayon has been close to a sale. As far back as two years ago, there were reports that Arris was going to buy the firm for as much as $350 million. But then Terayon announced the need to restate its past earnings, scaring off any would-be suitors until it cleaned up its financials.
In the new bidding contest, some sources think that Motorola has the inside track because of its strong pursuit of Terayon since early autumn. Even with its purchases of Broadbus Technologies Inc. , Vertasent LLC , and Netopia Inc. over the past few months, Motorola also may still have a few gaps in its digital video product line left to fill.
Cisco, however, has also been quite aggressive in the digital video space over the past year with its buyouts of Scientific Atlanta and Arroyo Video Solutions. Sources say Cisco may be seeking to fill its own perceived product gaps or simply to scuttle a deal for its cable archrival.
Market watchers say Harmonic, which has been seeking to grow through acquisitions, too, is interested in Terayon because it previously resold some of the firm's equipment. In addition, Harmonic, unlike Motorola or Arris, is located near Terayon in the Bay area so it could consolidate operations more easily. "They could put engineers in the same building," says a source at a technolgy equipment company in the same market.
As for Arris, it has made no secret of its interest in expanding into the video hardware business. In a move that caused much buzz early last month, the Atlanta-based vendor announced plans to raise at least $225 million in a fresh offering of convertible senior notes to boost its war chest for future purchases.
"I would think Arris would be the most likely [buyer]," contends the equipment vendor source. "I don't think it provides for future success, but it gets them going."
— Alan Breznick, Site Editor, Cable Digital News