Arris-Motorola: A Year Later

Stock Flies High As Integration Nears Completion
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When Arris swallowed up Motorola Home, a company twice its size, there were fears that the $2.35 billion deal might cause a bout of indigestion for one of cable’s key suppliers, as well as for Arris’s customers and stockholders.

Integrating product lines, which included several overlaps, and the combining of two very different cultures presented a daunting task.

Though not everything has gone perfectly, the merging of the companies has been as smooth as could’ve been predicted, particularly when viewed through a financial lens. In the fourth quarter of 2013 (Arris had not yet posted first-quarter results as of press time), the company bucked the trend as settop shipments jumped 43% while revenues beat Wall Street expectations.

And investors don’t have a lot to complain about. Arris shares closed at $16.48 each on April 17, 2013, the day it closed the Motorola Home acquisition, and were trading in the neighborhood of $26 in mid-April. The getting was so good that Comcast, which held a 7.7% stake in Arris last April, recently cashed in some shares as it reduced its holdings in the vendor to 5.1%.

So, it’s been a decent year, but not necessarily an easy one, Arris chairman and CEO Bob Stanzione told Multichannel News in a recent interview in which he reflected on the acquisition as it neared its one-year anniversary.

‘ON RIGHT PATH NOW’

“The first six months were tough, quite honestly. But the second six months have proven that the work during those first six months was done well and it has already begun to pay off,” Stanzione said. “The product teams put their road maps together very quickly; the sales teams came together very quickly.

“After going through a trough during the second and third quarters of last year, we saw the business begin to really respond well in the fourth quarter … The business is on the right path right now.”

Stanzione said he believes that the historic Motorola Home business, which includes set-tops, modems and network gear and software, has improved because the unit is no longer operating under the weight of uncertainty it had carried when Google was shopping it.

“There was so much distraction and drama in that business for so long,” Stanzione said. “I think the employees appreciate being in part of something where they are front and center and it’s about them, not about other things that are going on in the business.”

But the process of integrating Motorola Home still isn’t done — it’s 80% to 90% complete, in Stanzione’s estimation. With the integration of people (Arris cut 500 employees, or 6.8%, of its work force last year as part of the streamlining effort, but is now in hiring mode again) and product lines complete, the company is now polishing off work behind the curtains — the integration of the IT and finance systems, which ended up as one of the acquisition’s biggest unexpected challenges.

“It’s just hard work … there’s nothing magical about it,” Stanzione said, adding that Arris is also in the process of phasing out its Transition Service Agreements with Google. “We’ll be in fairly good position by the middle of the year.”

With the product lines now fully integrated, Stanzione said, Arris is now investing more in R&D than either it or Motorola Home did on its own.

A sizable chunk of those dollars have gone toward the development of nextgeneration in-home products. Among recent activity, Comcast has begun to roll out HD-DVRs from Arris that run on the MSO’s X1 platform, and last month Verizon Communications started to deploy an Arris-made wholehome DVR/media server platform that is capable of recording up to 12 shows at once.

Arris is also setting aside R&D dollars for new in-home and metro WiFi products, Stanzione said, as the notion of the Internet of Things (IoT), where everything is connected, continues to take hold.

“In-home WiFi has become a pretty darn important aspect of every product that we ship,” he said. “Everything is wireless these days.”

Another future-facing investment focus for Arris is 4K/Ultra HD — a stillnascent video platform that packs in four times the resolution of HD. Sales of 4K-capable sets continue to ramp up and distributors still aren’t offering much content in the format. But Stanzione is bullish on 4K’s prospects.

“We believe that 4K television is real; it’s coming,” Stanzione said, pointing to Arris’s development work on network gear that can transmit 4K signals on the network and display them in the home. “I think three to fi ve years from now, it’s going to be fairly widespread … the TV is getting exciting again.”

REVISED ROAD TO RETAIL

As reported last fall, Arris inked a deal with Google that allows it to use the Motorola brand on cable modems and other consumer-facing devices sold at retail for an additional two years.

In preparation for a time when perhaps it will no longer use the Motorola mark, Arris has already begun to sell products at stores that show both the Moto and Arris brands, including a DOCSIS 3.0 cable-modem router with on-board 802.11ac WiFi.

“We’re high on retail,” Stanzione said. “But as a percentage of our sales, it’s relatively small. [Retail] strategy is going to evolve, and it’s something we are definitely interested in growing.”

Arris has a couple of new retail products in the making, including an RF extender that can expand service coverage in the home. The hope is that the retail mix will eventually cover a broader range of self-install products, Stanzione said, including more complex devices such as whole-home video solutions.

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