C-COR Could Be Arris’ Missing Video Link
$730M Deal Forms Biggest Pure-Play Vendor, Duo Says
By Todd Spangler -- Multichannel News, 9/30/2007 8:00:00 PM
Arris Group plans to acquire C-COR for $730 million in cash and stock, in a move intended to offer cable operators a hefty alternative to Motorola and Cisco Systems for equipment in their networks.
The combination would create what the two companies claimed will be the largest technology vendor focusing almost its entire sales effort on cable operators. The deal could close the book on Arris’ search for a video play to broaden its business beyond data and voice products.
Arris is a top supplier of cable-modem and telephony equipment, and holds market share second only to Cisco’s. For the 12 months ending in June 2007, Cisco captured 50% of that market, followed by Arris with 30% and Motorola with 15%, according to an August report from research firm Ovum RHK. C-COR sells broadband-access platforms for cable and video-on-demand systems.
| SNAPSHOTS: Arris, C-COR | ||
|---|---|---|
| The merged company would have reported $1.2 billion in revenues for the last 12 months. | ||
| ARRIS | C-COR | |
| * For 12-month periods ended June 2007 SOURCE: Company reports |
||
| Business | Cable modems, telephony equipment, termination systems | Cable access networking, equipment, video-on-demand servers, operations support systems |
| Headquarters | Suwanee, Ga. | State College, Pa. |
| CEO | Bob Stanzione | David Woodle |
| Employees | 781 | 1,260 |
| Top Customer* | Comcast (41% of revenue) | Time Warner Cable (31% of revenue) |
| Revenue* | $951.2 million | $277.3 million |
| Gross Margin* | 26.5% | 45.3% |
| Net Profit* | $157.6 million | $28.1 million |
Together, the pair would have reported $1.2 billion in revenues over the last 12 months. Arris and C-COR combined can now offer cable companies a suite of equipment covering all three legs of the triple play — TV, phone and Internet — Arris chairman and CEO Bob Stanzione said on a conference call with investors last Monday.
“This transaction that we’re announcing this morning is a giant leap forward for us in supplementing the video component of our portfolio,” he said.
The deal would let the merged entity stack up competitive products against Motorola and Cisco (which owns Scientific Atlanta) in several major categories, with the exception of set-top boxes and video encoders. Specifically, Arris will gain C-COR’s product lines for optical and radio-frequency transport, VOD and switched digital video management.
The proposed Arris/C-COR union comes about eight months after Arris attempted to launch itself into the video-gear business with a $1.2 billion offer for Tandberg Television, which was ultimately bought by telecom-equipment giant Ericsson.
It may have been just as well for Arris that the Tandberg deal fell apart, said Infonetics Research analyst Jeff Heynen, because the C-COR product portfolio is a much better fit.
“We all knew that video was the missing piece for [Arris],” Heynen said. “But I really think C-COR makes better sense for them [than Tandberg] because they can expand what they’re offering to the [operators] they already sell to.”
DEVIL IN DETAILS
But the devil, Heynen added, is in the details of how well they can take advantage of the cross-selling opportunity: “Because Arris hasn’t been in the video space, there’s the challenge of getting the sales and marketing efforts up to speed to be able to talk about their having an end-to-end solution.”
Plus, “the guys who purchase the data equipment don’t necessarily buy the video stuff,” Heynen said.
Stanzione noted on the call that Arris’ proposed deal for Tandberg was bigger and he acknowledged that C-COR is closer to Arris’ traditional cable customer base.
Arris and C-COR together count 250 customers, including Comcast, Time Warner Cable, Cox Communications, Charter Communications, Cablevision Systems, Insight Communications, Bright House Networks, Rogers Communications and Liberty Global.
“Not to say this was on the rebound or anything, but [acquiring C-COR] was exactly what we were looking to do,” he said. “We have always said our greatest strength is in the cable industry, and that our focus on the industry is what has enabled us to compete successfully against the larger companies that are more diversified in terms of the markets they serve.”
The Arris/C-COR deal has been approved by both boards of directors, but not by the companies’ respective shareholders. Pending approvals, the acquisition is expected to close in January.
News of the deal sent C-COR shares up 22% on Monday, while Arris’ stock price fell 16% that day evidently on concerns that the price tag was too rich.
Under the terms of the deal, Arris is offering individual C-COR shareholders either a cash payment of $13.75 or 0.9642 Arris shares per share, although Arris said those elections will be pro-rated to keep the mix of the offer 51% in cash and 49% in stock.
The $13.75-per-share offer represented a 19% premium to the 30-day trading average of C-COR’s common stock. C-COR shares closed last Thursday at $11.47, up 16% from the closing price before the deal announcement.
But while C-COR investors were relatively upbeat, Arris investors were concerned. ThinkEquity Partners analyst Anton Wahlman lowered the 12-month price target on Arris’ stock from $20 to $15 on Monday, “while we consider the impact of the pending C-COR merger.”
“We believe the proposed merger with C-COR makes a lot of sense, but believe the price paid is at least close to a full price, causing some valuation concern,” Wahlman wrote. “Having said that, we believe that from a synergy and integration perspective, this particular target has one of the lowest risk factors of anything Arris could have done.”
| COMBO PACK: The Sales Breakdown | |
|---|---|
| SOURCE: Company reports |
|
| REVENUE BY PRODUCT LINE | |
| Customer premises equipment and supplies (Arris) | 50% |
| Broadband (Arris) | 27% |
| Access and transport (C-COR) | 18% |
| Video on demand (C-COR) | 3% |
| Operations support systems (C-COR) | 2% |
| REVENUE BY CUSTOMER | |
| Comcast | 34% |
| Time Warner Cable | 14% |
| Cox Communications | 9% |
| Liberty Global | 7% |
| Other U.S. | 11% |
| Other International | 25% |
TURNABOUT FOR C-COR
The deal represents something of a turnabout for C-COR, which in recent years had itself been a voracious acquirer. Under CEO David Woodle, it made 13 separate acquisitions between 1999 and 2005, worth $440 million.
C-COR snapped up such cable vendors as nCUBE, Stargus, Alopa Networks and Optinel Systems, extending the company into video-on-demand and IP telephony management. Those deals helped C-COR land more business with U.S. and international cable firms and telephone providers.
At last count, C-COR had 1,260 employees and Arris counted 781, with a combination of more than 850 engineers. Arris spokesman Alex Swan said no decision has been made about whether layoffs will result from the merger.
On the call with analysts, Arris chief financial officer Dave Potts said the companies anticipate “some overlap in functions” and anticipate more than $10 million in annual operational cost savings over time from the merger.
Potts noted there will be some up-front costs associated with integrating the companies. Swan said the savings cited by Potts “related to non-people activities, like reducing outside legal and accounting help.”
Stanzione said Jim Lakin, president and chief operations officer of Arris Broadband Group, has been appointed “chief integration officer” to manage the process of combining Arris and C-COR. He also said that one C-COR board member — to be announced at a later date — will join Arris’ seven-member board.
Asked if Arris may be considering additional acquisitions after C-COR, Stanzione replied, “We’ve certainly got our hands full for the next few months … but I wouldn’t rule anything out beyond that period of time.”
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