2HRS2GO: Motorola-GIC has potential

You can understand the initial reaction to news reports that Motorola Inc. (NYSE: MOT) wants to buy cable network equipment maker General Instrument Corp. (NYSE: GIC)

Based on the Motorola's closing price Friday, issuing $10 billion of stock increases the number of outstanding shares outstanding by about a sixth, so today's drop in the company's stock price has some logic behind it. But for Motorola, the deal itself is even more logical.

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Motorola already commands one of the top brands in cable modems. We all accept the fact that broadband Internet access is the wave of the future, but as with most industries, the big, fat, steady, high margin area lies not in the front end, but behind the scenes with headends and other parts that make up cable and satellite networks. General Instrument is the established market leader there, with Scientific Atlanta running second.

Adding General Instrument's stable to Motorola's consumer product strengths creates an end-to-end solution for cable service companies. "This is a combination that makes a significant amount of strategic sense," says Pete Peterson, who follows Motorola for Volpe Brown Whelan. "This deal would definitely give a lot of oomph to Motorola's claims in this sector."

The reported price of $10 billion isn't so expensive. Yes, an 11-figure sum is huge by any standard, but as ABN Amro analyst Kenneth Leon points out, even a $12.2 billion cost would be less than five times GIC's estimated 2000 sales. Leon, who follows both companies, believes $12.2 billion would be a fair price, seeing how Motorola adds 20 percent to its outstanding shares while providing a 20 percent premium for GIC.

Investors nowadays think a 20 percent premium (let alone the lower $10 billion figure reported by the news media) for anything is cheap, which is probably why General Instrument shares are also taking a slight hit today. But GIC's stock price has more than tripled in the past year, yielding to a current multiple of roughly 45 times estimated 2000 earnings, as of last week. In other words, high expectations are already built into the stock price, so you can't expect an acquirer to pay much more, unless this escalates into a bidding war. But not many companies in the communications equipment field are as much of a strategic fit as Motorola and GIC, and in any case, Motorola's huge war chest may discourage any potential rivals.

As far as what it means to Motorola's bottom line, GIC is already more efficient than any Motorola division; in the latest quarter completed, General Instrument came in with operating margins of 13 percent, while Motorola as a whole came in at roughly 4 percent. And no Motorola unit posted operating margins higher than 10.6 percent.

So Motorola won't have to cut much fat. Some investors might take that as a bad thing, since it means Motorola doesn't have much room for easy bottom line boosts; but on the other hand, Motorola can use its much larger sales force and better known brand name to sell more digital set-top boxes for cable TV. Analysts estimate set-top boxes could be a market in excess of $20 billion within in a few years, and guess who already leads in that field? It's not Scientific Atlanta.

Companies talk all the time, so you never know if this deal will actually happen, and happen at the prices cited by the unnamed sources of the Wall Street Journal and the Los Angeles Times. But if it does, shareholders of both sides ought to be happy in the long run, even if they aren't today.

Other issues:

Spyglass Inc.

(Nasdaq: SPYG) Shares are up a bit today for this Internet technology provider, which could benefit from a Motorola-GIC deal, since GIC currently has a research partnership with Spyglass. It's a nice set-up, in which GIC basically pays Spyglass to do research. And if Motorola can boost GIC's set-top box sales, Spyglass will rake in increased license fees.

Global Telesystems Group Inc.

(Nasdaq: GTSG) Investors are bailing out on this European telcom provider following Bear Stearns analyst James Henry's decision to cut revenue estimates. "This is the second quarter in a row in which (Global TeleSystems) has missed our numbers," Henry says in a research note.

But he kept a "buy" rating on the stock. And Merrill Lynch reiterated a near-term "buy" rating, while Prudential Securities repeated a "strong buy" advisory. Europe's traditional telcos may be fighting back with lower prices, but as competition continues to grow in the Old World, there's still a healthy long-term outlook for smaller, nimbler providers like Global Telesystems.

Hoovers Inc.

(Nasdaq: HOOV) J.P. Morgan analyst Susan Walker-White reports this well-known provider of financial information is about to unveil its a new marketing campaign and a new website, while tripling the number of companies and offering e-mail alerts about corporate and industry news.

Walker-White thinks the timing is right. Maybe I'm being overly skeptical, but considering all the wide availability of financial information on the Web, it seems like Hoovers has enough work just preventing its current customer base (which traditionally has bought those big, thick Hoovers books) from migrating to Web rivals, let alone boosting its overall revenue growth. Then again, you could probably say the same thing about Ziff-Davis and ZDNet.

Market indices remained slightly negative this afternoon. With about two hours left in regular trading, the Nasdaq Composite Index was down 16.72 to 2870.34, the S&P 500 lower by 6.84 to 1344.82, and the Dow Jones Industrial Average down 2.54 to 11025.89. 22GO>