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Arris Group Inc. (ARRS - Analyst Report), a cable equipment manufacturer, has agreed to purchase Motorola Mobility’s set top box (‘STB’) business in a cash and stock deal worth $2.35 billion. If successful, the deal will be a transformational for Arris, and will make it a much bigger player in the cable box business.

Per the deal, Arris will pay $2.05 billion in cash and the remaining $300 million in newly issued shares of the company which in turn will give Google Inc. a 15.7% stake in the cable OEM (Original Equipment Manufacturer). The deal, which is subject to regulatory approval, is expected to close in the second half of 2013. Following this announcement, the shares of Arris leaped $2.46 or 16.92% on Nasdaq in the after-market trade on Wednesday.

As part of the transaction, Arris will get access to Motorola’s 2,000 patents including video conferencing and digital right management patent besides obtaining the right to license additional intellectual property from the handset manufacturer. On the contrary, Motorola’s patent-infringement litigation with TiVo Inc. (TIVO - Analyst Report) remains a matter of concern for Arris.

In May this year, Google acquired a 100% stake in Motorola Mobility in an all cash deal worth $12.5 billion. The strategic rationale behind the move was to benefit from Motorola’s impressive portfolio of 17,000 patents, which will allow the search engine giant to compete more efficiently with Apple Inc. (AAPL - Analyst Report) and Samsung Electronics Co. as the smartphone battle intensifies around the world.

However, Google was not much interested in Motorola’s STB business and put up the division for sale on December 7, 2012. Arris and UK-based Pace Plc submitted the most compelling bid for the unit. But Arris succeeded in outbidding Pace and other multiple bidders for the unit.

The deal is a significant one for Georgia-based Arris as it will profit in quite a number of ways. Following the completion of the deal, Arris will become a dominant CMTS (cable modem transmission system) player behind market leader Cisco Systems Inc. (CSCO - Analyst Report).

Subsequently, Arris will benefit from significant top and bottom-line growth besides adding two of the largest cable operator Comcast Corp. (CMCSA - Analyst Report) and Time Warner Cable (TWC - Analyst Report) as its customers.    

According to IDC, global STB market is set to register a 5.6%, 2010-2015 compounded annual growth mainly attributable to worldwide expansion of pay TV service. We believe acquiring STB unit makes sense for Arris as it will have access to Motorola’s wider market and expanded customer base.

We maintain our long-term Neutral recommendation on Arris Group Inc. Also, it holds a Zacks #3 Rank, implying a short-term Hold rating on the stock.

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