Motorola ups ante in video race with Terayon

Motorola continued its IPTV arms race today by announcing an acquisition of Terayon Communications, a vendor of digital video processing equipment.

Motorola has agreed to pay $1.80 per share for Terayon, or about $140 million in cash. The deal gives Motorola a video processor to counter Ericsson’s recent acquisition of Tandberg Television and Cisco Systems’ acquisition of Scientific Atlanta. Other competitors include BigBand Networks, RGB Networks and Scopus Video Networks.

Terayon’s products include the Network CherryPicker, which allows service providers to “rate-shape” video content in order to optimize network bandwidth consumption. Terayon’s gear also allows service providers to insert local advertising and overlay graphics into video services.

The move is only the latest by Motorola to beef up its presence in the video market. It has already acquired video equipment vendor Tut Systems, video-on-demand vendor Broadbus and Swedish set-top vendor Kreatel. Rivals Cisco and Ericsson have kept pace in what has amounted to a veritable three-way land grab in the video vendor environment. When Ericsson moved to acquire Tandberg TV last month (outbidding Arris), analysts speculated that other large vendors might follow, including Alcatel-Lucent, Huawei Technologies, Nokia-Siemens, Nortel Networks and Tellabs.

Terayon’s biggest customers include Comcast (which contributed 20% of Terayon’s total revenue last year), Cox Communications, Time Warner Cable, EchoStar Communications and video encoder vendor Harmonic (which contributed 15% of last year’s revenue). Ericsson sells Harmonic equipment as well.

Terayon’s price tag, only about twice its annual revenue, is a bad sign for the company’s peers, according to a note issued by Think Equity Partners analysts today. Think Equity predicted in February that Motorola would acquire Terayon, using its vaunted financial muscle to beat out Harmonic, another potential acquirer. "Motorola has had a relationship with RGB for a product line that's in many ways similar to Terayon's," they wrote in February. "However, we believe RGB is a very well-performing (meaning fast-growing) company and is likely going to be expensive to acquire. In order to protect itself, and keeping this property away from arch-enemy Cisco, we believe Motorola is the most motivated party to acquire Terayon."

"We believe Arris tried to acquire Terayon in August 2005 but backed away as a result of having discovered accounting problems," the analysts wrote this morning. "Now that Terayon looks to end up in Motorola's hands, this creates a stronger competitor to Arris and across the cable TV infrastructure space."

Publicly held Terayon reported more than $76 million in revenue last year (more than two thirds of which came from the United States) and a net loss of nearly $4 million, or $0.05 per share. At the end of last year, it had more than $20 million in cash and investments and an accumulated deficit of more than $1 billion.

At the end of last year, Terayon had 114 employees, 99 of which were located in the U.S. Motorola intends to maintain Terayon’s headquarters in Santa Clara, Calif., the company said today.

Both companies expect the acquisition to close in this year’s second or third quarter.