VIDEO POSITIONING AT STAKE IN MOTOROLA TAKEOVER BID

Next Level Communications' battle with Motorola over an uninvited tender offer is as much about becoming the dominant provider of copper-based video technologies as it is a proxy fight.

In a lawsuit filed last week, Next Level accused Motorola of coercing shareholders into accepting its $30 million bid to take over the 26% stake in the Rohnert Park, Calif.-based vendor that Motorola doesn't already own. In addition, Next Level claims Motorola, which got its Next Level stake through the acquisition of General Instrument, starved the company of funds, prevented it from seeking outside funding and used confidential information to develop its bid.

Motorola's bid amounts to $1.04 per share, a 14% premium at the time of the offer. Since then, Next Level shares have traded around $1.20. “Next Level shareholders would be in a position to reject the offer except for the way that Motorola went about this,” said one executive close to the situation. “They structured the offer so that it's coercive. They've vetoed the company's efforts to go out and get third-party financing.”

According to one executive whose company approached Motorola about acquiring its stake in Next Level, the accusations hold some truth.

“Trying to prevent an acquisition and effectively blocking any acquisition are perhaps the same thing,” he said. “Nobody could have really made an acquisition attempt on Next Level because of how indebted they are to Motorola. It would be too ugly to try and unwind all that.” (Next Level — which had net losses of $78.6 million in 2001 and $208.6 million in 2002 — owes Motorola $70.3 million in long-term debt.)

Motorola's takeover bid comes at an opportune time in the life cycle of copper-based video because the technology has matured and Motorola can begin building on the progress. After running on the bleeding edge, Next Level has done the yeoman's job of seeding the technology among small telcos (see figure).

Although Next Level reported 2002 revenues of $57.4 million, which was down from $93.2 million in 2001, the company projects a revenue increase over the next 12 to 18 months as the technology moves into the larger independent carrier and Canadian carrier markets. “We are looking at a vastly improved 2003,” said J. Michael North, CEO of Next Level.

Competitors also are predicting increased interest from larger carriers because of the development of ADSL-based video systems. Carriers outside the U.S., particularly in Asia, have driven the costs of such systems down to a point that video deployment is now economical.

“The cost of the technology is in line with regular ADSL now,” said John Kasha, vice president of business development for Xavi, which has done most of its business in China.

Set-top boxes that currently cost about $350 will drop to $200 in three months and to about $125 by December, according to Reed Majors, vice president of marketing and business development for Minerva, which announced last week that Midwest Telnet, a consortium of rural telcos in southwestern Wisconsin, would use its IP television solution. “Since Kingston deployed in the U.K., the video-over-ADSL market has doubled every year,” Majors said. (Kingston was the first to deploy video over ADSL in 1999.)

Motorola's potential takeover of Next Level would put it in position to emerge as one of the dominant providers of telco video gear. It also might lend credibility to a segment that has been struggling for recognition from the large U.S. carriers. While Qwest Communications has deployed VDSL in limited areas, other Tier 1 carriers have shown little interest, although North claims Next Level has been in talks with other RBOCs.