M&A Alert - September 22, 2009
Arris Agrees to Acquire Digeo
Transaction Overview
On September 22, 2009, Arris (NASDAQ: ARRS) agreed to acquire the assets of Digeo for up to $20mm in cash.
Target Description
Digeo is a provider of digital media recorders direct to retail customers via national retailers and via cable company OEM relationships. Products include Moxi Media Center, Moxi HD DVR and Moxi Mate which provide digital video recording, high-definition programming, and digital content media management. In January 2009, the company started selling to retail consumers. As of 2009, Digeo claimed to have 500,000 Moxi DVRs installed via cable OEM relationships. Founded in 1999, Digeo, Inc. (formerly known as Broadband Partners) has 75 employees and is based in Kirkland, Washington. Since inception, Digeo had received at least $110mm in funding from Paul Allen’s Vulcan Capital. Assets acquired include 130 issued patents and 58 patents pending.
Buyer Description
ARRIS Group develops, manufactures, and supplies cable telephony, video, and high-speed data products. The Broadband Communications Systems (BCS) segment offers VoIP and high speed data products for residential and commercial services. The Access, Transport and Supplies (ATS) segment provides fiber optic infrastructure and radio frequency equipment products. The Media Communications System (MCS) segment provides content and operations management systems, including products for video on demand, ad insertion, and digital advertising operations management. MCS offers fixed mobile application servers that enable content delivery across wireless and packet cable networks. ARRIS Group markets its products primarily to cable system operators and multiple system operators. Competitors include Cisco, Scientific-Atlanta, Ericsson (via Tandberg Television) and Motorola (via Terayon). Arris has a market capitalization of approximately $1.8b. Bob Stanzione, ARRIS Group’s CEO and Chairman, was the executive sponsor of the transaction. ARRIS Group was founded in 1969 and is headquartered in Suwanee, Georgia.
The consideration paid to shareholders is $16mm in cash upon closing plus the potential for an additional $4mm as an earn-out. Digeo had laid off half of its employees in 2008 as part of the company’s efforts to re-examine product’s line and strategy.
Strategic Rationale
ARRIS is one of the key vendors supplying a variety of products and services to cable system operators. Cable system vendors have been aggressively upgrading their infrastructure to offer IP-based services such as high speed data access, telephony, HD video and Video On Demand (widely known as “Triple Play”). Digeo supports ARRIS’ strategy to extend its video product suite, as announced in March 2009. Digeo brings significant IP around its product set, strong DVR user interface software and Moxi Mate which allows recorded media (via the DVR) to be played on any TV within the home. Earlier in September 2009, Arris also purchased EGT (a video transcoder/encoder technology provider) for $6.5mm.
Architect Partners’ Observations
Digeo has been struggling for some time and underwent a very significant restructuring in early 2008 which included cutting the employee base by half. We believe Digeo never penetrated cable operators in a material enough fashion with its DVR product offering. As an attempt to invigorate revenues, Digeo even attempted a direct to consumer distribution strategy via retailers. TIVO and Sling Media are two examples of relative successes with related products but it’s a challenging endeavor to penetrate these major cable vendors as a young, single product.