In a famous scene from the movie “The Graduate,” an older man wraps a knowing arm around a recent college grad and delivers cryptic counsel on which career path the young man should follow: “Plastics,” he advises.
If that scene were being re-shot today, the vocational advice might plausibly be changed to “convergence”–and in high-tech circles, anyway, there would be nothing cryptic about it.
The belief that a variety of devices will “converge” so that cable television, video, e-mail, high-speed Internet access and telephony will all be delivered through a single TV set-top box is at the heart of Motorola Inc.’s announcement Wednesday that it will buy General Instrument Corp. in an $11 billion stock swap.
In making its biggest acquisition ever, Schaumburg-based Motorola will exchange .575 shares of its stock for each General Instrument share.
The deal was coldly received by Wall Street, with Motorola shares dropping $6.56 to $86.62 and General Instrument closing at $47.27, down $3.23.
Motorola Chief Executive Christopher Galvin said the acquisition makes sense because of the speed at which various kinds of communications devices are melding. Convergence is “now happening,” Galvin said in a conference call with analysts. “This will enable it more significantly.”
After the announcement, Motorola spokesman Scott Wyman said some layoffs are possible due to redundancy, “but we do not expect significant reductions in either Motorola or General Instrument” because of the expectation that business will increase, he said. General Instrument has about 7,000 employees, while Motorola employs about 130,000.
The deal, expected to close during the first quarter of 2000, will result in a new business unit within Motorola’s Communications Enterprise consisting of General Instrument and the cable operations of Motorola’s Internet and Networking group. General Instrument CEO Edward Breen is slated to stay on and head the new unit, reporting to executive vice president Merle Gilmore, who heads the Communications Enterprise.
General Instrument will remain based in Horsham, Pa., a suburb of Philadelphia, where it moved from Chicago in February 1998.
The companies have complementary products in the market for so-called broadband–the movement of voice, data and video either over coaxial cable or wirelessly via satellite. As the name suggests, broadband is a bigger, much faster transmission pathway, making possible delivery of an array of services that would choke regular delivery systems such as conventional phone lines.
Motorola already manufactures the cable modems that deliver high-speed TV and Internet content to consumer homes, and it makes the chips used in set-top boxes. General Instrument makes set-top boxes and equipment that allows cable companies to scramble, unscramble, distribute and manage programming. The company has special expertise in video transmission.
Breen pointed out that the cable industry has undergone dramatic consolidation from more than 30 customers for his company’s set-top boxes to about a half-dozen huge companies, like Cox and Comcast, increasing pressure for a supplier to have more complete product lines.
He also noted that there is a huge international pool of potential customers, at least six times bigger than the U.S. market, waiting to be served with converged devices funneled through cable TV.
The changing face of cable illustrates the march of convergence. Among the major players now is phone behemoth AT&T, which acquired Tele-Communications Inc. with the idea of offering phone, TV and Internet service through one pipe.
Galvin said the acquisition will knock about 5 percent off Motorola’s projected 2000 earnings. Consensus estimates are for earnings of $3.05 per share, meaning the deal will cost stockholders about 15 cents per share. The deal is expected to contribute to earnings growth in 2001, Galvin said.
Despite the enthusiasm of both CEOs, Wall Street has been wrinkling its nose at the deal since word of it leaked out on Monday.
Since Friday, when its shares closed at $98.75, Motorola stock has lost 12 percent of its value.
General Instrument got a similarly severe haircut. Its stock is off 10 percent from Friday’s $52.50 close.
In an interview with CNN-Financial Wednesday morning, Galvin predicted that Wall Street eventually will warm to the merger.
Chris Chaney, an analyst with A.G. Edwards & Sons Inc. in St. Louis, said that “longer term, it (the merger) sounds like a good strategic fit.”
But more immediately, investors reacted negatively because Motorola just passed through a horrendous year in 1998 that saw it begin layoffs now totaling about 24,000 and take a $1.98 billion restructuring charge. “Motorola is still making its way out of a turnaround,” Chaney said. “People think it already has a lot on its plate.”
General Instrument shareholders may be disappointed “that GI did not shop around more,” Chaney said. He noted that based on closing prices on Tuesday, the deal amounts to a 6 percent premium on General Instrument’s share price, while some acquisitions involve premiums of 20 or even 30 percent.
Some of the drop in Motorola valuation might be profit-taking by investors using the acquisition as an excuse to harvest fruit from a long upswing in stock price, which languished around $40 per share only a year ago, said Joel Goldhar, professor of technology management at Illinois Institute of Technology.
Apart from technology synergies touted by the companies, the General Instrument acquisition could be good for Motorola because it may bring the electronics giant closer to consumers, addressing a weakness in its approach to customers.
Unlike other major company products like cell phones and semiconductors, which are sold to manufacturers and wholesalers, set-top boxes are sold directly into end users’ living rooms.
“Their weakness has always been marketing,” Goldhar said. “I hope this will encourage them to think more about consumers.”
From a Motorola perspective, the acquisition continues an 18-month-old pattern of bold strokes intended to refocus the company on digital cell phones and other wireless technology, and on convergence devices.
Besides massive layoffs, Motorola has sold off the commodity portion of its semiconductor operations to concentrate on more complex and profitable chips used in multipurpose communications devices.
Last summer, it began introducing new cell phones and has regained some market share from wireless handset leader Nokia, of Finland.
The company has attempted to break an insular tradition of relying on in-house expertise to develop technology, announcing several partnerships including alliances with Lucent Technologies Inc. and Cisco Systems Inc.
Motorola also has moved aggressively into satellite voice and data delivery. It founded and is the largest shareholder in the now-bankrupt $5 billion Iridium satellite phone system and is the chief contractor and an investor in the $10 billion Teledesic Internet-in-the-sky program.
Galvin offered measured support for Iridium. He cited the difficult reception other Motorola-developed technologies, like two-way radio and paging, have had when introduced. “We’re hopeful it will work out,” he said. But he pledged no specific commitment to the foundering phone system, only assistance “on a very practical basis.”
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