Mergers & acquisitions

Terayon Sweepstakes Stalls

The auction for Terayon Communication Systems Inc. has bogged down, due to concerns about lawsuits lodged against the company by shareholders, former executives, and other firms.

Financial community and industry sources say the three-way bidding war for Terayon, which was supposed to be completed before the end of February, has dragged on several weeks longer than expected. The reason is that the suitors are worried about what it will take to settle the latest round of litigation and who will have to pay.

While Terayon has largely resolved the initial class action suit by shareholders with a $15 million settlement, several other suits have been filed over the past few months, including a new class action suit by shareholders over the company's accounting problems, a countersuit by two former executives charged by the company with breach of contract, and several patent-related suits.

"People are afraid to touch this," says one source. "It's not as clean-cut as they thought it was."

While sources still believe that Terayon will be sold, they're no longer saying that a deal seems imminent. Instead, they now expect the three potential buyers -- Motorola Inc. (NYSE: MOT), Cisco Systems Inc. (Nasdaq: CSCO), and Harmonic Inc. (Nasdaq: HLIT) -- to take their time sifting through the company's financial and litigation issues.

"The accounting issues and shareholder suits are holding things up," says one Wall Street analyst. "They make you second-guess how fast you want to go."

A Terayon spokesman declined comment on the progress of the sale negotiations.

Terayon, which estimated its fourth quarter earnings results two months ago, will report its actual results tomorrow after the stock market closes. In mid-January, the company estimated that it produced $17.6 million to $18.6 million in overall revenue for the fall quarter, down from $30.5 million in the year-earlier period. Its digital video processing products accounted for the drop in sales. (See Terayon Preps for Likely Auction.)

But Terayon is still seeking more time to complete its final consolidated financial statement for the entire year. In a new filing late last week, the company asked the SEC for a 15-day extension of the upcoming deadline for its 2006 Form 10-K report.

But Terayon is running into other sale obstacles as well. Despite a generally hot market for digital video tech firms, financial analysts say the three suitors could also be more reluctant to buy the company because of concerns that it hasn't updated its flagship CherryPicker line of products quickly enough.

"One of the problems that Terayon is having is they underspent their R&D budget for the last couple of years while dressing it up for sale," says Alan Bezoza, a senior research analyst with Oppenheimer & Co. He says the company is mainly attractive for its large installed base of CherryPicker systems, not the actual digital video processing technology.

In mid-February, Terayon did roll out a fresh set of software upgrades for its CherryPicker product line. The upgrades are designed to enable cable operators and telcos to insert localized graphics and ads into digital programming. (See Terayon Updates Its CherryPicker .)

But analysts aren't sure that such ad-oriented software upgrades really matter to cable operators and other video providers right now. "I don't think the ad insertion market they're targeting is at an inflection point yet," says Jason Ader, an analyst with Thomas Weisel Partners . "It's a 2008 market."

Analysts also cite continued reports of conflict between Cisco and its Scientific-Atlanta subsidiary over whether to pursue Terayon aggressively. While S-A officials are said to be very interested in acquiring Terayon, Cisco executives are said to be cooler on the idea.

"There's still tension between San Jose and Atlanta over M&A strategy," Bezoza says. "There are two groups of people fighting over what's going to happen."

— Alan Breznick, Site Editor, Cable Digital News

Pancakes 12/5/2012 | 3:11:41 PM
re: Terayon Sweepstakes Stalls My sources say the shareholder lawsuit is not significant and can be settled quite easily. I wouldn't stress to much over these lawsuits since they are not "expensive" lawsuits.

What matters is that once Cisco/Motorola/HLIT buys Terayon, it will be amazing to see how many revenue streams the winning buyer will enjoy from the Terayon products.

The ad localization benefits alone will make whoever buys Terayon standout to consumers who are always looking for more and more convenience.

Localization will be a VERY cool feature for consumers who are too lazy to open a phonebook!

Terayon is a big money maker in the waiting.
Pancakes 12/5/2012 | 3:11:32 PM
re: Terayon Sweepstakes Stalls
"a countersuit by two former executives over their separation deals, and several patent-related suits."

Terayon mentioned this article in their CC today, and said this is false.

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