Could An Arris-Motorola Marriage Work?

2012-11-09 17:31:31

11:45 AM -- If Arris Group Inc. (Nasdaq: ARRS) indeed makes a play for Motorola Mobility's cable business, the deal could create some value for the vendor but could likewise present "material strategic risks," Raymond James Financial Inc. (NYSE: RJF) analyst Simon Leopold surmises in a research note that weighs the pros and cons of such a marriage.
He's not predicting that Arris will buy the Motorola Home unit from Google (Nasdaq: GOOG), but it's considered one of the logical bidders, alongside Pace plc , Ericsson AB (Nasdaq: ERIC), CommScope Inc. and perhaps some private equity firms. He also notes that Arris tells him that it would look at the assets if they were for sale ... so that's a telling admission right there.
One issue is that Arris would likely have to raise significant debt and/or issue a lot of shares, Leopold writes, noting that the deal would "dramatically alter" Arris's balance sheet.
Sources tell me that Google will try to fetch about US$2 billion for Motorola Home. Leopold thinks it could end up getting closer to $1 billion to $1.5 billion, based on declining sales and the potential for restructuring. Arris ended the third quarter with $571.2 million in cash resources, so it will likely need some help financing the deal whether the price ends up in the high or low end of the range.
On the positive side, Leopold said an acquisition would cause Arris's 2013 earnings per share to rise to $2.47 from today's $1.23, noting that Motorola Home, at $3.5 billion in 2011, generates just over two times the sales of Arris.
Arris would also see set-tops suddenly become more than 30 percent of sales, versus just a drop in the bucket now (Arris has backed off from a forecast that its Moxi video gateway business will pull in $100 million this year). The deal would also make Arris a stronger CMTS foil to market-leader Cisco Systems Inc. (Nasdaq: CSCO).
But here's another troubling stat from Leopold -- Motorola's margins are typically 8 to 9 percent, off from Arris's average of 13 percent in 2011.
Arris has been active in M&A in recent years and has generally done a good job swallowing and digesting relatively small deals, but Motorola Home would present much more than a mouth-sized morsel for a company of Arris's size. Leopold foresees a "scaling challenge" for Arris because a Moto deal could more than double its current headcount of 2,100 and result in big restructuring expenses.
So, there's some good, bad and ugly when it comes to the prospect of an Arris-Moto marriage. But this unique opportunity would certainly give Arris a chance to emerge from the shadow cast by its larger rival, Cisco.
It's also not clear if the so-called "book" on Motorola Home is out yet, despite word that Barclays Capital has been tapped to vet the deal. But the latest scuttlebutt is that Google is not getting as much action and interest in the unit as it would have liked, so Leopold may be on to something when he suggests a $2 billion deal could be wishful thinking. And that situation, if true, could play into the hands of Arris, a shrewd company that has never paid top dollar for any of its acquisitions.
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