Electronics pioneer Motorola Inc. announced yesterday that it will purchase General Instrument Corp., the world's leading manufacturer of cable TV boxes, in an $11 billion stock deal aimed at positioning the company as a central player in the drive to link homes and businesses to the Internet and telephone networks through cable lines.
The companies' two chief executives portrayed the merger as a strategic natural that will allow them to cash in on the trend known as "convergence," by which voice and data are increasingly moving through single links into homes and offices.
"It allows us to participate in the fastest-growing segment of the communications industry," said Motorola's chairman and chief executive, Christopher B. Galvin. "The ability to build home hubs for the consumer here in the U.S. and take it around the world is a terrific opportunity. . . . People have been speaking about convergence and it's here."
The market did not share such enthusiasm. Motorola's stock lost $6.56 1/4 to close at $86.62 1/2, amid concerns that the purchase would dilute the company's earnings. General Instrument lost more than $3 to close at 47-35/128, or just over $47.27, as analysts questioned whether shareholders were taking home a sufficient premium, though they praised the long-term merits of the merger.
The two companies plan to close the deal by early next year, pending regulatory approval.
The merger mirrors what's happening in the cable industry in general: Just as many cable companies have been swallowed up by larger players, now the companies that sell equipment to the cable franchises are themselves growing bigger and fewer.
The significance of yesterday's announcement at a New York news conference was underscored by the presence of a third executive at the table, Leo Hindery, president and chief executive of AT&T Broadband and Internet Service. The former national telephone company has refashioned itself as a cable power, amassing more cable lines than any company in the country. It plans to use those lines as conduits to sell customers high-speed Internet service and video entertainment along with telephone service--a market known as "broadband."
Whether that bold blueprint brings profit rests in part on the development of the devices needed to make it work. That's where Motorola and its new property come in: Motorola is already the global leader in the production of cable modems, which allow telephone and computer signals to be transmitted over cable lines. General Instrument's latest cable boxes do far more than merely unscramble cable signals, functioning as gateways for a wide array of services, including telephone, interactive gaming and video.
"I feel like the father of the bride," Hindery, the AT&T executive, joked at the news conference. Asked what role he played in brokering the deal, Hindery said, "I did offer some insights into how the combined company might be more powerful together rather than standing apart. . . . The involvement of Motorola for my industry is manna from heaven."
In a later interview, Hindery went further. "I am a substantial customer of both of these companies and I encouraged them to get together," he said.
The Federal Communications Commission has ordered that cable boxes--now owned by cable companies and leased to their customers--be made available on retail shelves by next July. Though General Instrument is the largest maker of cable boxes, it has no retail presence. Motorola, on the other hand, is a retail powerhouse, putting it in a far better position to distribute the boxes so critical to AT&T's prospects.
Analysts and an industry source close to the discussions said Nortel Network Corp., an Internet equipment company, also made a strong play for General Instrument. A Nortel spokesmen dismissed that talk as "a rumor."
Hindery would disclose no other suitors, but he said he steered General Instrument to Motorola while seeking to convince Motorola of the merits of a purchase. "I certainly fell in love with this deal over all others," he said.
General Instrument would not offer any specifics on the negotiations with Motorola and did not confirm talks with Nortel. "We've been talking partnership with almost every major telecom player in the deal," said chairman and chief executive Edward D. Breen, who will stay on to head a new Motorola division focused on cable.
The notion of cable lines as communication pipes is well established, but the details are far from settled. Say your television set is in the living room but your computer is in the extra bedroom upstairs and your phone is in the kitchen. How does the cable line, now plugged into the television alone, reach them all?
Analysts expect wireless to play a role in beaming signals from the cable box to other devices in the house--printers, fax machines, phones and computers. They say Motorola, perhaps best known as a wireless telephone giant, is particularly well suited to the task.
Under the terms of the deal, General Instrument shareholders would receive 0.575 shares of Motorola stock for each of their shares, or $53.58 per General Instrument share based on Tuesday's closing price. Based on General Instrument's Tuesday closing price of $50.50, the deal represents a 7 percent premium for the company.
Given the growing focus on cable as a master communications system, analysts figure General Instrument may be the first of other cable-box producers to be snatched up. Scientific Atlanta, the second-biggest producer, has risen in recent days--though it shed $2.06 1/4 yesterday, closing at $56.37 1/2 on speculation that it could be next.
One analyst suggested Cisco Systems Inc., the Internet equipment maker, would be "a good fit."