New York -- Motorola Inc.'s $11 billion deal to buy
General Instrument Corp. dramatically expands the combined company's role in the
converging market for data, voice and other advanced services over cable.
While retiring the venerable GI name from the cable
business, the deal spawns a new force in broadband equipment, combining GI's
strengths in standards-based cable modems and advanced digital set-top boxes with
Motorola's massive retail-distribution network and its own standards-based
The deal immediately creates gear and capabilities that
neither company believed it could muster alone, especially for serving the burgeoning
markets of Internet-protocol telephony over cable and high-speed digital-subscriber-line
service over copper phone wires.
For GI, which will become a unit of Motorola's
Communications Enterprise group, merging with Motorola was partly defensive. It needs the
strength of Motorola's powerful brand name as cable equipment such as modems and
set-tops evolve into pure consumer retail products.
GI needs its new parent's market presence to remain
competitive internationally, where it acknowledges that is known, but that it has nowhere
near the clout of Motorola.
"This combination just put together the lead position
in the end-to-end cable-data business," GI CEO Ed Breen said after a news conference
announcing the deal.
Leo J. Hindery Jr., CEO of key GI customer AT&T
Broadband & Internet Services, joined Breen and Motorola CEO Chris Galvin in endorsing
the deal as a means to better support the promise of advanced services over cable.
Hindery also urged other equipment-company mergers in
response to the consolidation among major cable operators.
"It's imperative that the supply side similarly
matures and consolidates," he said. "I would be surprised and disappointed if
some of the suppliers to the industry persisted in parochial relationships and don't
take advantage of the type of energy Ed and Chris represent."
Paul Kagan Associates Inc. senior broadband analyst Leslie
Ellis said she wouldn't be surprised if other deals followed this one. "Last
December, GI was rumored to be in talks with Phillips [Consumer Electronics Co.], Toshiba
[America Consumer Products] and others," Ellis said. "Vendor mergers follow MSO
The deal raised speculation as to who might be the next
equipment-maker to be swallowed up. Scientific-Atlanta Inc. has seen its stock price rise
on speculation that it would be the next consolidation target, possibly falling to
Philips, Lucent Technologies, Sony Corp., Thomson Consumer Electronics or Nokia Inc.
There was also speculation of a counteroffer for GI, based
on the price Motorola is paying. Motorola agreed to exchange 0.575 shares of its stock for
each GI share, valuing GI stock at a little more than $53 per share. That marks a slight
premium on GI's stock price of $50.50 on the day of the deal.
Motorola and GI played down the lack of a premium, noting
that GI's stock price had run up on acquisition rumors.
After the deal closes, in about three months, GI
shareholders will own about 17 percent of Motorola. GI's largest shareholder,
AT&T Corp. subsidiary Liberty Media Group, will own 3 percent to 4 percent of the
Breen will continue to head the operations of GI, which
will combine with the cable business of Motorola's Internet and Networking group into
a new entity under the Communications Enterprise unit.
The deal's technology aspects reflect how partnerships
or acquisitions have become the primary way for equipment manufacturers to create
end-to-end solutions for cable operators, aiming toward mainstream retail sales of
customer-premises equipment such as modems and set-tops.
"We will begin getting GI into the Motorola labs to
look for engineering opportunities -- building of common products with a common
architecture across the business," Galvin said.
GI faced the prospect of more direct competition from other
equipment makers in the North American market that it dominates, as cable systems evolve
toward an open architecture, enabling operators to use multiple vendors for key network
Philips, for example, recently announced an agreement to
incorporate V-Bits Inc.'s technology for grooming digital-video streams into a suite
of end-to-end solutions for digital cable. The company believes it can compete head-on
with GI and S-A by assembling technology partnerships, which, it said, give the major
multinational electronics companies an edge over those trying to go it alone.
Motorola has been developing a digital set-top-box
architecture called "StreamMaster," but it remains far behind its merger partner
in that arena.
GI commands about 72 percent of the current North American
market for cable set-tops -- a market that could grow to some 113 million units in five
years from the current total of 20 million, according to research firm Allied Business
Much of that growth will come from new players with strong
consumer brand names. One day after GI and Motorola announced their merger, Sony Corp. of
America unveiled its first U.S. cable set-top deal -- a roughly $1 billion agreement with
Cablevision Systems Corp.
"If the set-top-box market takes off, that's good
for GI, but it also implies more competition," ABI analyst Navin Sabharwal said.
"I can see this buyout as a defensive strategy for them."
Motorola has a dominant 32.6 percent share of the worldwide
cable-modem market -- far ahead of runner-up Nortel Networks' 17.1 percent share and
GI's share of less than 5.5 percent, according to The Strategis Group.
Most of those modems are proprietary: Motorola has failed
so far to get interoperability certification under the industry's Data Over Cable
Service Interface Specification -- a key element in cable's plans to sell virtually
all cable modems through retail outlets.
But the company does have DOCSIS qualification for its
cable-modem-termination system, creating what Breen called a solid product combination
with GI's DOCSIS-certified modem and its widely deployed set-tops.