A single top-tier U.S. carrier played a large, influential role in the merger negotiations between Motorola and Tut Systems, regulatory filings revealed this week. Clues suggest that carrier could be Verizon Communications.

A video and broadband equipment vendor, Tut began weighing its options early in the second half of last year as it struggled to win tier-one carriers as customers. With a little more than 100 employees, Tut realized it would need to at least partner with a major vendor to win those large accounts. The company’s officers estimated two-thirds of its potential future growth would depend on top-tier customers.

In particular, Tut was trying to win a contract last year from a tier-one U.S. carrier for its edge modulation gear—a contract that had “the potential to generate substantial revenue,” according to Tut’s regulatory filings. Tut’s Astria edge modulation platform, unveiled in April 2005, converts video to IP for transport and to RF for last-mile delivery over fiber access and coaxial cable networks. This could suggest that tier-one carrier was Verizon Communications, which uses RF video in the last mile of its fiber access network.

The carrier in question told Tut it was too small a company to win its business and suggested Tut partner with a big brother. Motorola was one of four companies Tut engaged for that purpose, three of which were large, publicly held firms. Motorola happened to already be a supplier to that particular tier-one carrier, bolstering a Tut/Motorola combination in the eyes of Tut’s management (and again suggesting Verizon is the carrier, as Motorola currently supplies optical access gear for Verizon’s video rollout). Because Motorola might be able to seal the edge modulation deal post-merger, Tut also suspected Motorola would likely offer a higher price than other would-be acquirers.

Following several meetings between the two vendors, Motorola in late October 2006 submitted an acquisition offer between $0.99 and $1.10 per share. In early December, it offered to pay a price at the top end of that range. Tut, dangling the possibility of the edge modulation contract, countered with its own offer of $1.20 per share.

As the two haggled over a price, Tut’s cash was eroding, and the board realized that, even if Tut received a competing bid, it would likely run out of cash before it could finish merger negotiations with another company. At the end of September 2006, Tut had about $4.6 million in cash--barely more than a third of what it had nine months earlier.

None of the other three companies Tut had engaged ever ended up making an offer. (Tut could still entertain competing bids today if it wants to, but, under the terms of its agreement with Motorola, it would have to pay a $1.375 million break-up fee if it merged with another company.)

The promise of an edge modulation deal may have been persuasive. In mid-December, Motorola agreed to pay $1.15 per share for Tut--a nearly 19% premium over its stock price at the time and 4% to 16% above its initial offer in October.

Also revealed in regulatory filings this week were separation and retention agreements made to Tut’s existing management. As part of a separation agreement with the company, Tut’s chief executive officer Sal D’Auria will receive $900,000 (1.5 times his base salary and target bonus) six months after the merger closes. He is also still eligible for a 2006 bonus worth up to $125,000. For up to three months after the merger closes, D’Auria will act as a consultant to Motorola, earning $29,167 per month.

Motorola will pay retention incentives to keep Tut’s vice president of global sales, marketing and customer care, Robert Noonan, for at least two years. Noonan’s base salary will remain at $225,000, but he will be eligible for a 2007 target bonus of $101,250. And as a retention incentive, he will be paid another $391,500 in cash (60% of that after a year, the other 40% after two years) plus $261,000 in Motorola stock (after two years).

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