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3 December 2015

Arris Pace complete – let the battle of the set top giants commence 

Last week, when we wrote up the clearance of the acquisition of Cisco’s set top business by Technicolor, it struck us that it would be unfair to clear this merger, announced long after the Arris Pace deal, if it then changed the market to such an extent that the Arris Pace deal was then refused. We felt it was likely we were only a few days away from Arris being given the same approvals.

This week the Arris pace deal once again overtook the Technicolor Cisco one, gaining approval from the DOJ under the Hart-Scott-Rodino act that defines modern anti-trust rulings in the US, and clearing the Brazilian merger approvals as well. The Technicolor deal has still to get through Brazil, but it’s sure to (although Technicolor is exceptionally strong there although Cisco isn’t).

Already Arris has previously received clearances from regulators in Colombia, Germany, Portugal and South Africa, but it does not need one from the European Union generally.

The deal is still not home and dry, as it needs a UK court to say that its financial shenanigans, whereby it essentially stops being a US company, and becomes a UK based business, are legal. This is the real bone of contention behind some US investor mistrust of this deal. It is called a tax inversion, and it means that the company will reconcile profits back to the UK, and pay tax on them there, a practice that the US President himself has publicly called “unpatriotic.” In a way that’s hilarious. Google, Apple and Amazon pay no tax on profits made anywhere in Europe (Apple might in Irleand), but export it all home, to support the US government. One company goes the other way, and it’s unpatriotic. Tax is something that governments should legislate on, not moralize on.

But many US investment funds are deprived from investing in companies domiciled outside the US by the way they are set up, and this may in the end create the same valuation issues in Arris shares, that made it able to buy Pace for almost nothing (0.6 x revenues). It is essential that Arris continues to have most of its investors come from the US, because UK investors simply do not understand, trust or invest in, tech.

But even if the UK court throws out the tax efficient arrangements being put to it by Arris, this won’t mean the merger is off, just that it gets delayed while lawyers sort out another way to do the tax paperwork. So as we said right at the outset, this is a done deal, as is the Technicolor deal, providing both of them with some scale with which to defeat the invasion of consumer electronics specialists like Samsung and Humax into the set top business.

Arris will also have a cloud play through its acquisition of ActiveVideo and the software Elements in Pace, while Technicolor will rely on a partnership with Cisco to provide those kinds of capabilities. We can’t help thinking that the French firm remains at a distinct disadvantage.

In pure hardware terms there are many other set top businesses around the world and some emerging from China ready to take a bite out of the Arris, Pace, Cisco and Technicolor hegemony. This is only round one of consolidation.