Motorola Is Expected to Buy General Instrument
Motorola Inc., looking to strengthen its position as a top cable industry supplier, is expected to announce this week that it’s acquiring General Instrument Corp. in an all-stock deal valued at more than $9.5-billion, sources close to the transaction said.
The proposed deal, which follows months of takeover speculation on Wall Street about General Instrument, could spur a consolidation among cable suppliers that would mirror the concentration over the last year among the nation’s cable television operators. Those mergers have created seven large companies that qualify for bulk discounts on the cable equipment that Motorola and General Instrument make.
The transaction also underscores historic changes in how cable equipment is sold to consumers. Analysts say General Instrument, the biggest supplier of television set-top boxes and a leading manufacturer of high-speed modems to the cable industry, needs a well-heeled partner such as Motorola to ramp up a retail distribution operation, as cable operators begin to sell their equipment at consumer electronics outlets. Motorola, which is the largest supplier of high-speed modems and also makes chips that drive set-top boxes, is planning to capitalize on its existing retail infrastructure; the Schaumberg, Ill.-based company is a leading manufacturer of cellular phones.
The cable industry, which traditionally has bought equipment from suppliers such as General Instrument and leased it to customers on a monthly basis, plans to shift to the retail market to help offset the cost of rolling out a host of competitive new services. Cable operators already have started selling high-speed access to the Internet via a special modem that enables customers to surf the Web at speeds 100 times faster than they can now over phone lines.
State-of-the-art set-top devices, with high-speed modems built in, enable customers to play along with game shows, chat with others watching the same program, send e-mail or do their banking on TV. Some customers even have started using their cable lines to make phone calls.
The cable industry has spent upward of $28 billion during the last three years upgrading its networks for delivery of these new services and is looking to retailers to help eliminate the additional expense of the upgraded equipment. Advanced cable modems cost operators about $200 apiece, and the fancy set-top devices cost them $400 and up.
The retail deployment is just starting and is expected to accelerate the roll-out of new cable services that require painstaking installation and customer education.
The cable industry has been handling the installation and equipment sales thus far, but analysts expect the retail momentum to gather steam next year when the cable industry is expected to reach consensus on standardized set-top boxes.
To prepare for the sale of equipment at the retail level, the cable industry has been working for several years on standardizing equipment so that a customer of one cable company can use the same store-bought modem or set-top box when he or she moves across town or to another state and signs up with a different cable company. The industry only recently agreed on a standard for modems.
PaineWebber Group said it is polling 35 retail stores across the country to get a sense of the pace of the roll-out. Tom Eagan, the brokerage’s cable analyst, said in August that six of the stores were selling cable modems, up from only three in June.
The standardization of cable equipment could spur a consolidation among suppliers. Eagan said the purchase of General Instrument could also enable Motorola to reduce its reliance on the maturing cellular phone business at a time when broad-band services are heating up.
Motorola suffered a setback in the wireless business last month when Iridium, in which it was a major investor, filed for bankruptcy protection.
Eagan estimated that advanced-modem sales would double from about 1.5 million in 1998 to 3 million by the end of 2000 and that 5 million U.S. homes would own digital set-top boxes--which have only been available since the start of the year--by the end of 1999. A more advanced set-top device will be available from General Instrument next year.
Liberty Media, a cable programmer and part of a portfolio of media investments controlled by cable mogul John Malone, is the biggest shareholder in General Instrument, with about 28%. The acquisition values Horsham, Pa.-based General Instrument at more than $56 a share. The stock closed Friday at $52.50, down 44 cents, on the New York Stock Exchange.
