Who Wins In The Google-Arris Deal?
Adam is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
When Google (NASDAQ: GOOG) snatched up Motorola Mobility this spring, its intents were clear. The company was after Motorola’s smartphone patents. However, the deal came with a little extra baggage – the Motorola Home division. The division operates with significantly lower margins than Google’s core business, which worried investors back in the spring. Now, those worries can be put to rest as Google found a buyer for the business earlier this week in Arris Group (NASDAQ: ARRS).
I’ve been told investing is a zero-sum game. In every transaction, there’s a winner and a loser. I stubbornly refuse to believe that this is always the case. I think the deal between Google and Arris is a great example of a win-win deal.
The deal is a clear win for Google in my opinion. It’s a software company, and that is where it excels. Motorola Home carried operational risk for Google in that it had to move hardware units – not its forte. That’s why Google has essentially been trying to get rid of the business since it first bought it in the packaged deal with Motorola Mobility.
It’s interesting that Google, a company that seemingly has its hand in everything tech related, is willing to get rid of a piece of one of its business segments. This shows great control from leadership, and a dedication to its core capabilities along with a focus on the expanding mobile market.
The $2 billion in cash will go to help bolster Google’s outstanding balance sheet. The deal also gives Google $300 million in Arris stock representing 16% ownership. This makes Google Arris’ largest shareholder. I believe this will turn out to be a good investment for Google, as you’ll see.
In exchange for $2 billion in cash and $300 million worth of stock, Arris is able to add Motorola’s cable box and cable internet modem to its portfolio. It also gains access to a slew of new patents from Motorola in areas such as digital-rights management and video processing. The stock deal also gives Google incentive to support Arris at every turn through licensing deals, and creates great potential for a partnership between the two for Google’s forays into living room technology.
The biggest improvement in the outlook for Arris is that the deal diversifies its current customer base. Prior to the deal, Arris generated about half of its revenue from two customers – Comcast and Time Warner Cable (NYSE: TWC). The newly acquired Motorola Home will diversify sales so that five accounts make up half of revenues. This makes the company’s risk more systemic instead of based on the growth of two companies.
Moreover, Arris is better capable of synergizing Motorola Home than Google. The company expects to take 12 months to reach the full potential synergy of the two companies. There are big plans in the works. Incorporating internet video delivery and multi-screen experiences for cable subscribers is just the tip of the iceberg. Arris also plans to integrate Motorola’s expertise in cloud computing analytics and security and its advanced networking capabilities into its portfolio as well. The significant increase in research and development scale will increase Arris’s growth potential as well.
As streaming media becomes increasingly popular, Arris combined with Motorola stands to help cable providers offer a competitive product to typical streaming fare like Netflix and Hulu. Video on Demand service often requires cable boxes capable of internet video delivery. Providing new equipment to customers will allow Time Warner and other cable companies to keep up with the move toward streaming video through the internet.
It’s also worth noting that Google has agreed to carry the liability of a potential liability from a lawsuit by TiVo (NASDAQ: TIVO). In the case TiVo wins a large settlement, Arris’s liability is capped and Google will foot the rest of the bill.
Overall, the company expects the deal to create a significant accretion in earnings per share of $0.15. Additionally, strong cash flows from the resulting synergy will allow the company to pay down the debt it used to finance the acquisition. At an interest rate of just 1%, the amount of debt is definitely manageable.
The deal provides Arris with a better diversified customer base and product portfolio which enhances its relevance in the marketplace. Furthermore, it increases the company’s R&D scale allowing it to keep up with market changes and grow faster. Finally, the deal will help Arris generate more than enough cash flow to cover its debt obligation. Even after the acquisition caused a 10% jump in stock price, I still believe this one has room to run.
adamlevy has no positions in the stocks mentioned above. The Motley Fool owns shares of Google. Motley Fool newsletter services recommend Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!