UK set-top box maker Pace has made a bid for the larger Motorola Home business currently owned by Google, raising questions over how it would finance the move.
If successful, Pace’s ambitious move would at least triple its size and make it the world’s runaway leader in set-top boxes at a time when it has been struggling to recover from a bad 2011 and loss of a major customer. Recently, Pace confirmed that BT Vision, the UK’s third-largest pay-TV operator with a hybrid DTT/IPTV service, had cancelled its contract for set-top boxes conforming to the UK’s YouView connected TV platform.
Shares in Pace have been suspended since the move to acquire Motorola Home was announced. This is because under UK Listing Rules, the transaction would be classified as a reverse takeover where the company being acquired may effectively be in control. Such takeovers are often financed by share swaps and, as such, require significant reorganizations at board level as well as shareholder approval. In the UK, trading in the acquiring company’s stock is suspended until these processes are resolved.
For Pace, the move appears to represent a reverse in the recent strategy of moving away from being a hardware company towards software and services. But, the company has decided that a dominant position in hardware would place it better to compete in the increasingly competitive global market for CPE (Customer Premises Equipment), including home gateways where software will play an increasing role in delivering not just TV but also extended smart-home services.
Analysts' views are mixed, with some arguing that the huge range in estimations of Motorola Home’s value highlight the risks involved for Pace in buying a business comprising a range of different parts. The value of the bid has not been disclosed, but figures range wildly from $1 billion to $2.5 billion, although it is likely to be closer to $1.8 billion. The Motorola Home business itself generated $797 million revenue in the third quarter of 2012, approaching double that of Pace, but only a modest $25 million operating income.
At least Google’s willingness to entertain a bid clarifies its strategy. Google acquired the set-top box business as part of its $12.5 billion acquisition of Motorola Mobility in May 2012. But, the main reason for the move was to acquire Motorola’s large portfolio of communications patents. Since the acquisition, Google has started revamping Motorola’s loss-making mobile phone business, but paid less attention to the set-top box side. Even so, there had been speculation that Google might use the Motorola set-top box business to gain a foothold in the living room and reinvigorate its stuttering Google TV. The Pace move suggests such speculation was wrong, and there have even been rumors that Google itself might help finance this reverse takeover, motivated by the desire to obtain a good return for its shareholders.
Google may actually have been intent on starting a bidding war that would attract other leading contenders, notably Cisco and French-owned Technicolor. However, the latter might be ruled out on the grounds that the French government has too much control over Technicolor, while Cisco has itself appeared to be edging away from the set-top box market it entered with the acquisition of Scientific Atlanta for $6.9 billion early in 2006. On the other hand, Cisco likes to be in markets where it is a clear number one, and the acquisition of Motorola Home would fulfill that ambition.
The other possibility is that private equity firms might enter the running, sensing the opportunity to break up Motorola Home and sell off the good parts while closing down the rest.