ARRIS to Acquire Motorola Home Business for $2.35 Billion

On December 19, 2012, ARRIS Group, Inc. (NASDAQ: ARRS) and Google Inc. (NASDAQ: GOOG) jointly announced that ARRIS and Motorola Mobility, a Google subsidiary, have entered into a definitive agreement under which ARRIS will acquire the Motorola Home business from Motorola Mobility, for $2.35 billion in a cash-and-stock transaction approved by the Boards of Directors of both companies.  The acquisition will be on a cash-free, debt-free basis and is expected to be significantly accretive to ARRIS’ Non-GAAP earnings starting in the first full year after closing.

Under the terms of the agreement, upon closing of the transaction, Google will receive $2.05 billion in cash and approximately $300 million in newly issued ARRIS shares, subject to certain adjustments provided for in the agreement, representing an approximately 15.7% ownership interest in ARRIS post-closing.

Acquiring Motorola Home will enhance ARRIS’ ability to provide next-generation consumer video products and services, supporting a more comprehensive product offering while also accelerating its ability to deliver a comprehensive set of industry-leading new products for broadband to a wide spectrum of customers.  The transaction will increase ARRIS’ patent portfolio and provide a license to a wide array of Motorola Mobility patents.

Together, ARRIS and Motorola Home will have a global presence with over 500 customers in 70 countries, more than tripling ARRIS pro forma combined revenue to approximately $4.7 billion for the trailing four quarter period ended September 30, 2012.  The combined entity will offer a wide array of products and solutions and will have an expanded customer base encompassing the full spectrum of broadband content and service providers.

On the heels of this announcement, the Motley Fools CAPS Community, which consists of 180,000-plus investors within the Fools free investor community, has given ARRS a five-star rating. See Five Star Stocks Making Big News: Arris Group. One of those participating in the Fools CAPS explained his positive outlook on ARRS as follows:

The deal with Google provides Arris with a lot of great patents that it can use. The company also sent 16% of its stock to Google, giving Google a lot of incentive to support Arris whenever it can. This could be key to getting great returns if Google decides to partner with Arris for some living room technology projects. The deal appears to be accretive for EPS, and the cash flows provided by the combination should be more than sufficient to cover the debt Arris took on to pay Google. All in all, Arris looks to have acquired something it can synergize well, and put itself in a good position with Google.

One deal, no matter how good, warrants investors running out and buying a stock. If anything, the news of big deals frequently gets over bought and inflates the value of the company above justified levels. That being said, there is certainly nice logic of the Google incentive to support ARRIS and its investment. But without additional signs pointing upward I’d still be skeptical.

There just so happens to be additional signs pointing upward. Now I am no investing genius.  In fact, one virtually sure way to know whether a stock will go up or down is to ask me what I think of it and then ask whether I’ve bought any. If I have bought any then run like there is no tomorrow — you know in a Mayan post apocalyptic way. If I have not bought any then look deeper and consider it. I have a knack for pulling the trigger on losers and avoiding winners, even if it is because I don’t have any liquid capital to invest quickly enough to take advantage of my own insights.

Notwithstanding, one of the things I like to see is that the company believes in itself. While a stock repurchase program is nice, it really can only be some evidence (at best) relating to whether a company’s stock will increase. So you might want to take this with a grain of salt, but Arris announced on November 1, 2012, that its Board of Directors authorized an additional $150 million in share repurchases of the company’s common stock. ARRIS currently has $19.6 million available under its prior authorization for share repurchase, and since 2008 the company has repurchased 34.2 million shares at an aggregate cost of $306.3 million.

“As a result of our fundamental belief in the long-term success of the Company, as well as our continued commitment to enhance shareholder value, we concluded that authorizing a new program is in the best interest of our shareholders,” said Bob Stanzione, ARRIS Chairman and CEO at the time of the latest stock repurchase announcement.

Thus, we have a big deal to acquire the Motorola Home business from Motorola Mobility and an ongoing stock repurchase plan with Google owning nearly 16% of the company? Call me crazy but I think this warrants serious investors taking a closer look at the fundamentals.

So am I going to invest in ARRIS? At present I own absolutely no stock in ARRIS, at least not that I know of but I do hold money in various retirement vehicles so I suppose it is possible I indirectly own some somewhere that I’m not aware of.  I also do not have any intention of buying the stock presently. Not because it doesn’t sound enticing, but because I am investing what I can into expanding, which is a business I know from the inside out.

Happy investing!


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