The push to deliver high-speed Internet access, telephone service, interactive games and video-on-demand to American homes by way of cable lines appeared to gain momentum yesterday, amid reports that electronics giant Motorola is close to buying General Instrument Corp., the world's largest maker of cable boxes.
Neither company would confirm the talks about the deal--an all-stock transaction valued at nearly $10 billion--and the market registered its displeasure, slicing more than 5 percent off General Instrument's stock value and more than 8 percent off Motorola's. The talks were reported Monday by the Wall Street Journal and the Los Angeles Times.
Some analysts said the market was reacting to the belief that General Instrument should command a higher price, and that the deal would dilute Motorola's earnings. But many described the purchase as a strong fit, teaming General Instrument, a cable-equipment powerhouse with little brand-name recognition, with Motorola, a global technology leader whose name is linked to everything from the first car radios to the latest cellular phones.
"They're looking to combine their strength and become a bigger player in broadband," said Patti Reali, a communications analyst with Dataquest Inc.
"Broadband" has become mantra throughout the communications world as more data flow through wires and over airwaves, choking communication systems. Technology companies are obsessed with finding new ways to move more data faster as demand grows.
Cable, once merely a way to supplement television programming, has evolved into a key focus of such efforts. AT&T Corp., once the nation's telephone monopoly, has been gobbling up cable franchises as it seeks to sell telephone and Internet service over cable wires.
"Everybody sees that all this stuff is going to grow," said Edward Snyder, a wireless-equipment analyst with Hambrecht & Quist Group Inc. in San Francisco. "If you're going to be the preeminent company, you need to play in all the spaces."
Motorola is still primarily a wireless communications company, gathering most of its revenue from sales of cellular phones and pagers. In recent years, Motorola has struggled to overcome problems in many of its businesses, including its 18 percent investment in the Iridium LLC global satellite telephone company, which is now in bankruptcy.
Motorola is the largest producer of cable modems, devices that link cable boxes to the Internet. In June, Motorola announced plans to join with Lucent to develop technology for delivering telephone service over cable lines. Motorola has also developed a computer chip that allows cable boxes to handle large amounts of data.
Horsham, Pa.-based General Instrument claims 90 percent of the world market share of digital cable boxes, which unscramble cable signals, and 60 percent of older analog models. But the company has swelled by selling its products to cable companies, which lease the boxes to their customers, collecting monthly fees. Under an order from the Federal Communications Commission, cable boxes must be available to individual consumers at retail markets by July.
Several analysts noted that Motorola would bring much-needed retail experience to the General Instrument alliance. Others noted that the two companies are now producing separate products that should really be one.
"GI sells set-top boxes, Motorola sells cable modems that can hook up to cable boxes," said Snyder, the Hambrecht & Quist analyst. "Why would you want to buy two if you could buy one?"
With cable boxes headed for stores, analysts expect them to become more sophisticated, turning into "the gateway to broadband coming into the home," Reali said.
Given the growing value of cable boxes, some analysts wondered whether General Instrument shareholders would take home enough value. Under the reported terms of the deal, General Instrument shareholders would receive slightly more than half a share of Motorola stock for every one of their own shares, valuing the deal at between $9.5 billion and $10 billion.
"What you're getting here is really a premium property . . . it seems like a low price," said Mark A. Langley, a communications-equipment analyst at New York-based Gruntal & Co, recalling that earlier this month, Cisco Systems Inc., another industry leader, paid nearly $7 billion for Cerent Corp., a money-losing start-up that is projecting sales of $100 million this year.
The market appeared to agree: General Instrument closed down $2.81 1/4 at $49.68 3/4. Motorola lost $8.25 to close at $90.37 1/2.
But Bradley Williams, an analyst with Legg Mason in Baltimore, said Motorola's downturn merely reflects the fact that it is reportedly buying a company that trades at a higher premium, effectively watering down its earnings for the next fiscal year. "Strategically, it could wind up being a good deal for Motorola," he said.
The news also drove down shares of Broadcom Corp., the leading maker of cable-modem chips, which derives about 28 percent of its sales from General Instrument. Broadcom lost $9.68 3/4 to close at $109.31 1/4.