Has Motorola Found Its Cable Guy?

Buying GI would give it broadband clout

Inside the labs of Motorola Inc., engineers have spent the past few years on "Cable Comm," a plan to cook up strategies and technology to use cable-TV networks to handle high-speed digital communications. With cable lines passing by more than 75% of U.S. homes, Motorola grasped that the networks would be able to cash in on the convergence of voice, video, and data services in the home. "The greatest growth opportunities in telecom are in wireless and broad bandwidth," says Christopher B. Galvin, Motorola's CEO. "We're implementing a strategy to win."

But until Sept. 15, Motorola didn't have such a good shot at the cable-based broadband world. A leader in wireless and chip markets, it had only one dominant line of business in cable gear--as the top supplier of modems to cable-TV operators. On the 15th, however, Galvin sealed an $11 billion deal to buy General Instrument Corp., the No. 1 maker of cable set-top boxes.

COPPER BONUS. The acquisition catapults Motorola, based in Schaumburg, Ill., deep into the sizzling broadband realm. By hooking up with General Instrument, Motorola moves closer to cable companies preparing to pump as much as $70 billion over the next three years to turning their networks into high-speed digital pipelines.

The deal even comes with a sweetener. General Instrument also brings in knowhow for DSL (digital subscriber lines), a technology to provide broadband service over copper telephone wire. GI holds a majority stake in Next Level Communications Inc., a high-profile maker of DSL gear. So Motorola is now positioned on both sides of the broadband race. "That's the hidden jewel," Galvin says.

Investors, however, see only a diamond in the rough so far. Why? The deal involves swapping nearly six-tenths of every Motorola share for one share of GI. That values GI, with a market cap of $8.4 billion before the deal, at roughly $11 billion. Those terms would dilute Motorola earnings by some 15 cents per share in 2000, according to Alex Cena, a Salomon Smith Barney analyst. Motorola's stock tumbled 8.5%, to just over 90, on the day word of the merger leaked. "This is one of the worst ideas I've ever seen," howled one long-time stockholder.

CULTURAL MISMATCH? Unfazed, Galvin points to earnings growth expected in the second year of the merger and the promise of a global broadband boom. Even so, Motorola, which only recently rebounded from a string of poor quarterly reports, has little room to disappoint Wall Street. The bankruptcy of Iridium LLC, the satellite project it backed, hasn't helped investors forget the recent woes. Plus, GI has a volatile earnings history, reporting losses of $96 million in 1996 and $16 million in 1997 before logging $55 million in earnings last year.

Furthermore, Motorola has never acquired a company the size of GI, which had revenue of $2 billion last year. Yet the new teammates dismiss notions that the merger will create a cultural mismatch. After all, Motorola has long worked as a supplier of silicon chips to GI. The two companies "mirror each other in the way we think." says GI CEO Edward D. Breen. After the merger, General Instrument will remain a separate unit under its current executives.

If successful, the latest deal could help Motorola finally achieve its elusive goal of forging ties with cable operators such as AT&T, which bought Tele-communications International Inc. last year and proposed buying cable player MediaOne Group this year. What's more, John C. Malone, the former chairman of TCI, now heads AT&T's Liberty Media Group, which has a big stake in GI. "That's really where you want to be," says Mark McKechnie, a wireless equipment analyst for Banc of America Securities LLC. Motorola will also be able to combine its engineering know-how with GI's cable-router expertise to push broadband applications like 3-D video and interactive gaming into homes.

"This will be Galvin's legacy," says James M. Phillips, CEO of video-content provider Ipix. "That he fast-forwarded the company into broadband." For a CEO trying to make his mark, this looks like it could add up to a winning play.

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