Zebra Borrows $3 Billion for Bet on Internet of ThingsScott Moritz and Alex Sherman
Zebra Technologies Corp. is borrowing money to fund most of its $3.45 billion purchase of a Motorola Solutions Inc. unit, piling on debt in a bet on the future of tracking technology.
Zebra plans to finance the deal with about $200 million of cash and $3.25 billion in debt. That’s more than Zebra itself is worth, based on today’s closing stock price, which valued the company at about $3.1 billion. Its debt level will go from zero to about five times its adjusted annual profit.
The gamble is that corporate customers need more technology to track their products and employees. Both companies offer bar-code scanning, radio-frequency identification and other technology that companies can use to control their inventory, whether it’s retailers stocking shelves or hospitals recording doses of medicine. Motorola also has specialized tablets and computers for various industries.
“We felt this was the most cost-effective way to structure a deal -- the way for us to generate the most shareholder value,” Zebra Chief Executive Officer Anders Gustafsson said in an interview. He ruled out further meaningful deals in the immediate future, saying the company’s focus will turn to paying down debt.
Zebra shares sank 10 percent, even after Chief Financial Officer Mike Smiley told analysts on a conference call that the company would work to reduce its debt leverage to three times earnings within three years.
Internet of Things
Morgan Stanley, Zebra’s adviser on the deal, is fully underwriting the financing. That’s giving Zebra a way to join companies from Intel Corp. to Nvidia Corp. in investing in technology for the market known as the Internet of Things, where objects with sensors are connected online and can be moved or altered based on their location and conditions.
“Motorola does not have the enterprise focus or creativity to compete with tablets and iPhones -- I think Zebra does,” said Michael Genovese, an analyst at MKM Partners. “This is a good transaction from that perspective.”
Zebra closed at $61.39 in New York, suffering its worst one-day drop since December 2008. Motorola fell less than 1 percent to $63.37.
Zebra could consider issuing equity in the future, CEO Gustafsson said. The company expected this would be a “volatile day” on the stock market and isn’t worried, he said.
“Companies seem to feel they are on firmer financial footing, so they want to be more proactive on strategic actions,” said Scott Kessler, an analyst with S&P Capital IQ in New York. “The ability to raise the capital at appealing terms signals we are in a good economic environment.”
Zebra will get enough cash flow to pay off its debt, said Keith Housum, an analyst at Northcoast Research. The question is whether the combined business will be able to reach Zebra’s target of as much as 5 percent revenue growth a year, he said. While Zebra’s 2013 sales were up 4.2 percent from a year earlier, the Motorola unit’s revenue declined 2 percent.
“I’m not sure why they did this now,” Housum said. “Motorola was shopping it, and they probably felt they had to do it. They are managing this for the next 10 years.”
The deal leaves Motorola, once a giant of the wireless business, with only its government-services unit and some leftover network technology, called iDEN. The company split in two in 2011, cleaving off a mobile-phone business that was eventually acquired by Google Inc.
“We thought doubling down on government and public safety made sense,” Motorola Chief Executive Officer Greg Brown said on a conference call today. “It allows us to be manically and singularly focused on growing the public-safety business.”
Gustafsson said he had been interested in a potential acquisition of the Motorola unit for five years. Only last year, after Motorola did a strategic review and concluded there weren’t many advantages in keeping its government and enterprise units together, did serious discussions begin, Gustafsson said.
The government unit provides two-way radios, mobile computers and other communications equipment and networks for emergency personnel, police and utilities.
“Motorola is very excited about its government business. They want to take the two-way radio and expand into LTE and new software technology for first responders,” said Tavis McCourt, an analyst with Raymond James Financial Inc. “The enterprise business has become increasingly noncore.”
Motorola’s unit is bigger than Zebra, with sales of $2.7 billion last year, compared with Zebra’s $1 billion. The combined company would have had sales in 2013 of about $3.5 billion, according to a statement today.
About 4,500 Motorola employees will join Zebra. Both companies are based in the Chicago suburbs -- Motorola in Schaumburg, Zebra in Lincolnshire.
Motorola will return the proceeds of the sale to shareholders, while Zebra said the purchase will immediately add to its earnings. The companies plan to complete the deal by the end of this year.
Motorola also said today that preliminary first-quarter revenue was $1.8 billion, compared with an average estimate for sales of $1.88 billion in a Bloomberg survey of analysts. The company said it experienced lower demand in its North American government business, and lower-than-anticipated enterprise sales.
Goldman Sachs Group Inc. and JPMorgan Chase & Co. are advising Motorola Solutions on the transaction.