How to play this takeover

TomAndersonWhen two technology industry titans come together, the combined company surveys its infrastructure and cherry picks the best people, processes and procedures, then standardizes on the best.  The survivors inherit a whole new kingdom, twice the size of the old while the losers lick their wounds.  The acquiring company may win market share over the long term or maybe it wont; but the suppliers to this new and larger firm become richer and you can ride their coat tails.

The combination of Comcast and Time Warner Cable is one of those opportunities. The new combined entity will have 30 million subscribers that receive programming and/or internet access.  Since this is such a large installed base, the FCC is more than likely going to take a close look at the details behind the acquisition and focus on how much the consumer will be hurt.

Comcast has already come out and said that customer bills are “not going to come down or (even) increase less rapidly” which will not sit well with the FCC.  So, to justify the high prices, the company is likely going to turn to technology.   And in turn, the company most likely to benefit from this is Arris Group, Inc. (ARRS).  Comcast already had a tight relationship with Arris through a $150 million equity stake which amounts to 8% of the company and new developments in the industry are increasing its importance.

Arris makes the broadband access and communication systems that companies like Comcast use to offer video on demand packages.  Comcast has been the most progressive of the telecoms in offering its customers video on demand because it serves two purposes: 1) it requires a premium DVR/cable box even if the programming is free and 2) it doesn’t allow its customers to fast forward through commercials.  While this programming can be freely on demand, the cost is the time locked up for the commercials which advertisers love and is effectively free content for the Cable companies.

The future of programming is in the cloud and cable companies are playing catch up.  Companies like Netflix and Amazon have capitalized on people’s willingness to pay for on demand programming.  Just because these web services companies are leading the charge, doesn’t mean the cable companies are far behind.  At Cable Tec Expo in September 2013, the technology that was dominating headlines was “cloud based” programming.  Whether this ends up being video on demand, cloud based DVRs or place shifting, Comcast has been at the forefront.  For instance, Comcast recently formed a group called VIPER or Video IP Engineering and Research to get its content onto Apple and Samsung devices.  This type of place shifting could allow a subscriber access to shows he has recorded but would like to watch while on a business trip.  Its a service that Comcast could sell and would not require higher fees to the content companies like Disney or HBO.

Comcast recognizes that Cable is not going to be based on a heavy box sitting on top of a TV in 5 years and it made an investment in Arris to tighten the relationship with the company.  Now that Time Warner is likely going to be a part of Comcast going forward Comcast will likely reengineer the network based on Arris gear. using the seamless experience across multiple devices to justify the price increases.

If Comcast leads the charge here, others will have to follow and go back to Arris to revamp their own networks in turn.  The question is what happens to Arris?  As demand ramps up over the next 12 months, will Comcast be the only vendor with an equity stake?  Could a company like Cisco, which has seen its sales lagging reach out to acquire the company?  If fundamentals continue to improve, it doesn’t matter, either individual investors will bid up the share price or equipment vendors looking for a new source of growth will.  The best part is either way, you win.

Tracking the Jackpot,

Tom Anderson.

Note from Midas Legacy Editor: A former computer programmer, Tom attended NYU’s MBA program and then joined a hedge fund. Today, retired from Wall Street, he manages a small number of private accounts. He also runs our tech-stock recommendation service, Tech Stock Jackpot, available by invitation only.

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