Arris Group has agreed to acquire C-COR for a purchase price of approximately $730 million in cash and stock, the company announced today. Each share of C-COR will be converted into either a cash payment of $13.75 or 0.9642 shares of Arris.

The combined company will be the largest pure-play provider of equipment and solutions to the cable industry, according to Arris. Collectively the two companies reported revenues of over $1.2 billion over the past 12 months. Arris Chairman and CEO Bob Stanzione called the deal a giant leap forward in his five-point growth strategy for expanding Arris's product portfolio, adding more of a video component.

"It strengthens Arris's position as the leading pure-play cable solutions provider," Stanzione said on today's conference call explaining the details of the acquisition. "Secondly, it expands the addressable market that we can sell into, and it accelerates our video growth strategy, which is a very important element of our growth plan. It provides significant product-line expansion. It diversifies revenues across our key [multiple systems operator (MSO)], or cable-industry, relationships, and it enhances our financial profile through margin expansion."

Simon Leopold, communications equipment analyst for Morgan Keegan, predicted that the deal would be nearly neutral or accretive to 2008 earnings. He gave the acquisition an "outperform" rating, which indicates that its combined stock is expected to outperform the S & P 500 over the next six months. The rating reflects a positive evaluation of Arris' strategy in acquiring C-COR but marks a need for caution in near-term trends.

"We see risk to the stock near-term considering the reaction to the deal and cautious tone on the near term," Leopold said. "Arris has an excellent industry position, and to us the deal makes strategic sense in establishing a broader product line that can position Arris better against its very large, highly diversified competitors."

"Ten million [dollars] per year in synergy is certainly achievable, but there is reason for optimism that there could be more," Stanzione said. Revenue synergies were not built into the financial projections announced for 2008. In February, Ericsson outbid Arris in purchasing Tandberg TV, leaving Arris to look elsewhere to expand its offerings. Stanzione called the failed bid for Tandberg TV a much bigger step than the current C-COR announcement. C-COR will help get Arris to the next step by expanding its portfolio, especially in the video category, he said.

"You just have to face the reality when a deal like that falls apart because someone else bids much higher and put together a strategy that fits the reality in the marketplace," Stanzione said. "So it had to do with what's available. Not to say [the acquisition of C-COR] was on the rebound or anything, but this is exactly what we were looking to do. We were looking to expand our portfolio. We've always said that our greatest strength is in the cable industry, and our focus in the industry has been what's allowed us to compete successfully against the larger companies that are more diversified in terms of the market they serve."

Arris currently does not have plans for further expansion. Stanzione said that the company will have its hands full with the merged company's expanded portfolio of gear targeting the cable TV service provider market. "We've got a lot of work to do," he said, "but I wouldn't rule anything out beyond that period of time."

Stocks of both companies have fallen since July. Arris closed at $14.26 Friday, compared with a 52-week high of $17.89. C-COR peaked at $16 in July and has since fallen nearly 40%. David Potts, chief financial officer for Arris, said he anticipates the transaction will improve the company's financial profile, particularly in gross margins. Several analysts, however, are fearful the acquisition came with too hefty a price tag.

"We believe the proposed merger with C-COR makes a lot of sense but believe the price paid is at least close to a full price, causing some valuation concern," said Anton Wahlman and Eric Kainer, analysts for Think Equity, in a post-call report.

"Having said that, we believe that from a synergy and integration perspective, this particular target has one of the lowest risk factors of anything Arris could have done," Wahlman and Kainer added. "We believe the fit with C-COR is very good in terms of products, customers and overall corporate culture."