Arris Says Hello, Hello to Moto

Arris Group has embarked on the biggest makeover in its history with plans to swallow Motorola Mobility’s Home business — an entity more than twice its size.

Arris, an established player in cable data and voice equipment, last week reached a deal with Google buy the cable-focused Home unit for $2.35 billion in cash and stock. Arris chairman and CEO Bob Stanzione called it a “transformational” agreement that will enhance his company’s video expertise and also diversify its customer base.

“It transforms Arris into a large-scale video and broadband provider with a global footprint,” he said on a call with analysts.

The addition of Motorola Home would expand Arris’s reach into new product categories and geographies, and make it less reliant on Comcast and Time Warner Cable, which accounted for 52% of Arris’s revenue for third-quarter 2012.

Wall Street reacted favorably: Arris stock closed up 3.6% on Dec. 20, the day after the deal was announced. But while analysts agreed the Arris-Motorola Home mashup was a good strategic fit, they warned of challenges ahead, and some felt the price tag was too high.

“We believe Arris faces signifi cant integration risk and potential restructuring costs,” Raymond James & Associates analyst Simon Leopold wrote in a research note. “We would not be surprised if, after some time, Arris eliminates overlapping products and/or exits non-core products that contribute modestly to sales.”

Moreover, Motorola’s core set-top business is shrinking, Infonetics Research analyst Jeff Heynen noted: “Arris is clearly placing a bet that the decline will be off set long-term by a massive replacement cycle by video gateways.”

At this point, Arris does not plan to exit any of Motorola Home’s businesses at this point, according to Stanzione. He said the companies have assembled teams to develop an integration strategy, which will include Marwan Fawaz, the former chief technology officer of Charter Communications, whom Google tapped to run the Home group this summer.

In May, Google closed the $12.4 billion cash acquisition of Motorola Mobility, driven largely by Google’s desire to obtain the latter’s patents.

Under the deal with Arris, Google included provisions to cap potential liability from certain patent-infringement lawsuits, including TiVo’s pending litigation against Motorola. Arris will pay no more than $50 million in damages and royalty payments, according to a regulatory filing.

“Google has taken that risk off the table for Arris,” Stanzione told analysts.

Upon closing of the transaction Google will receive $2.05 billion in cash — which Arris is obtaining through debt financing fromBank of America Merrill Lynch and Royal Bank of Canada — and approximately $300 million in newly issued Arris shares. Google would end up with ownership stake of about 15.7% in Arris.

Among the companies Arris outbid for Motorola Home was U.K. set-top manufacturer Pace.

The combined entity is expected to generate $100 million to $125 million in annual cost savings by consolidating suppliers, R&D and sales and administrative functions. However, Arris expects to spend between $80 million and $100 million to achieve those synergies.

Arris said it has not yet made any decisions about layoffs in the Home division, which has about 5,000 employees.

The deal is expected to close by the second quarter of 2013, subject to regulatory approvals and other closing conditions.

Cable Tech Tie-Up

Arris and Motorola Home, if combined:

Revenue: $4.7 billion combined for 12 months ended Sept. 30, 2012 ($3.4 billion from Motorola Home; $1.3 billion from Arris)

Major customers: Comcast, TWC, Charter, Cox, Cablevision, Liberty Global, Virgin Media, AT&T, Verizon

Employees: About 7,000 (5,000 from Motorola Home; 2,100 from Arris)

Patents: 2,000 granted and in-process (1,000 acquired with Motorola); Google to cap Arris potential patentlitigation payments in TiVo case

Source: Company reports