Com­mS­cope to buy Ar­ris in $7.4 bil­lion deal

The Daily Star (Lebanon) - - BUSINESS -

NEW YORK: In­vestors hope the split be­tween Repub­li­cans and Democrats con­trol­ling the U.S. Congress will open up op­por­tu­ni­ties to pick new win­ners and losers be­cause some govern­ment poli­cies will be harder to pre­dict.

Cor­re­la­tions be­tween stocks and sec­tors were high in the run-up to Tues­day’s con­gres­sional elec­tions, mean­ing in­vestors have been ei­ther dump­ing or buy­ing all kinds of un­re­lated stocks at once.

Some funds have been dam­aged in what is a tough mar­ket to be a stock picker.

Now, with vot­ers giv­ing Democrats con­trol of the House of Rep­re­sen­ta­tives and Repub­li­cans re­tain­ing their Se­nate ma­jor­ity, fund man­agers can take op­po­site sides of var­i­ous pol­icy bets.

Th­ese might in­clude whether fi­nan­cials will ben­e­fit from dereg­u­la­tion even with stricter House over­sight, if health care will face more pol­icy pro­pos­als aimed at re­strain­ing costs, and whether mil­i­tary spend­ing will get caught in a tus­sle be­tween the two par­ties.

“If we are in a gen­er­ally volatile en­vi­ron­ment but one that’s not overly neg­a­tive, in other words a choppy mar­ket as op­posed to a bear mar­ket, I think that’s an en­vi­ron­ment where cor­re­la­tions can fall,” said Evan Brown, head of macro as­set al­lo­ca­tion strat­egy at UBS AG’s as­set man­age­ment busi­ness.

“There’s po­ten­tial for sec­tor out­per­for­mance and un­der-per­for­mance as a re­sult of the elec­tion.”

U.S. Pres­i­dent Don­ald Trump told re­porters Wed­nes­day that he was will­ing to work with Democrats on some pol­icy pri­or­i­ties.

Is­sues that could gather bi­par­ti­san sup­port in­clude a pack­age to im­prove in­fra­struc­ture, pro­tec­tions against pre­scrip­tion drug price in­creases and a push to re­bal­ance trade with China.

Stocks ral­lied Wed­nes­day, but one Cboe S&P 500 Im­plied Cor­re­la­tion In­dex .ICJ was down more than 9 per­cent and an­other .JCJ was flat.

Cor­re­la­tions be­tween stocks and sec­tors bot­tomed in Septem­ber but spiked in Oc­to­ber.

Even more dam­ag­ing: bonds and stocks moved in tan­dem, with both down for the month for only the 12th time since the March 2009 dawn of the U.S. bull mar­ket.

The Oc­to­ber sell-off was driven by macroe­co­nomic con­cerns tied to the U.S. Fed­eral Re­serve, tar­iffs and in­fla­tion and hit ac­tive fund man­agers badly.

U.S. large-cap ac­tive mu­tual fund man­agers posted their worst re­sults ver­sus their bench­mark since Septem­ber 2011, ac­cord­ing to Bank of Amer­ica Corp. data.

More con­flict in pol­icy de­ci­sions could mean those fac­tors drive stocks more than macroe­co­nomic de­vel­op­ments. For in­stance, in­vestors are bid­ding up sand and gravel sup­pli­ers Martin Ma­ri­etta Ma­te­ri­als Inc. and Vul­can Ma­te­ri­als Co. on the hope that bi­par­ti­san sup­port for in­fra­struc­ture spend­ing can move for­ward.

But ValueWorks LLC founder Charles Le­monides said he is trim­ming his stake in the stocks as they be­gin to re­flect too much op­ti­mism.

“We think there is a lot of op­por­tu­nity for peo­ple who are will­ing to do the hard work of in­vest­ing, which is find in­di­vid­ual in­vest­ments that make sense,” Le­monides said.

Macro forces might be less rel­e­vant than as­sumed in the short run.

The meet­ing ex­pected at the end of the month be­tween Trump and Chi­nese Pres­i­dent Xi Jin­ping could yield hope­ful words but no firm com­mit­ments to re­solve trade is­sues.

The U.S. Fed­eral Re­serve could raise rates as ex­pected in De­cem­ber while strik­ing a tone that keeps mar­kets calm. Both con­cerns - trade war and mone­tary pol­icy tight­en­ing – may end up be­ing left un­til 2019.

So long as mar­kets fo­cus on more parochial is­sues in­stead of trade and mone­tary pol­icy the im­pli­ca­tions for stocks could be pos­i­tive go­ing into next year, in­vestors said.

Low cor­re­la­tions be­tween stocks typ­i­cally also mean lower volatil­ity for the mar­ket over­all. It was such a be­nign sce­nario that helped stocks weather the un­cer­tainty of a new Trump ad­min­is­tra­tion in 2017.

Of course head­lines on trade, mone­tary pol­icy or an un­ex­pected macro is­sue could up­set the rosy out­look, keep­ing cor­re­la­tions high.

Global earn­ings and eco­nomic growth could peak.

Pol­i­cy­mak­ers, even those in the same party, could be so at odds that they make no pol­icy changes.

Repub­li­cans who have con­trolled the White House and Congress since Jan­uary 2017 sur­prised in­vestors by fail­ing to re­place the Af­ford­able Care Act even though it was a cam­paign prom­ise.

That makes odd­s­mak­ing hard now on a range of is­sues, from re­peal­ing a med­i­cal de­vice tax to pass­ing a bud­get or loos­en­ing reg­u­la­tions on banks. Each event could mat­ter at the sec­tor level, but are not likely to de­ter­mine the course of the mar­ket over­all. U.S. tar­iffs in place will start to bite com­pa­nies and in­dus­tries, adding new rel­e­vance to stock and sec­tor picks.

And the ag­gres­sive mone­tary pol­icy re­sponse to the 2007-2009 global fi­nan­cial cri­sis is wear­ing off, prompt­ing dif­fer­ences be­tween coun­tries and al­low­ing more de­fen­sive shares to gain in the United States, where they had once been eclipsed by tech­nol­ogy names.

Liz Ann Son­ders, chief in­vest­ment strate­gist for Charles Sch­wab & Co. Inc., said a mar­ket driven a broader range of stocks could help more peo­ple stay in­vested.

“Di­ver­si­fi­ca­tion has been a hard sell.” – NEW YORK: U.S. tele­com equip­ment maker Com­mS­cope Hold­ing said Thurs­day it would buy set-top box-maker Ar­ris In­ter­na­tional Plc in a $7.4 bil­lion deal to bulk up its busi­ness ahead of the global roll­out of 5G.

The of­fer price of $31.75 per share rep­re­sents a premium of 14 per­cent over Ar­ris’ Wed­nes­day close. Ex­clud­ing debt, the deal is val­ued at about $5.69 bil­lion, ac­cord­ing to Reuters cal­cu­la­tions.

Com­mS­cope shares slid more than 18 per­cent over con­cerns about the debt it would as­sume as part of the all-cash deal.

How­ever, Com­mS­cope Chief Ex­ec­u­tive Of­fi­cer Ed­die Ed­wards said in an in­ter­view the com­pany was no stranger to fund­ing trans­ac­tions with debt.

“Lever­age is some­thing that we have dealt with in our past sev­eral times with the ac­qui­si­tions that we have done,” Ed­wards said. “It’s some­thing we are used to and we know how to take cost out of the busi­nesses as we ac­quire them.”

Both Ar­ris’ and Com­mS­cope’s busi­nesses have been chal­lenged as cus­tomers view some of their prod­ucts as more com­modi­tized and be­ing eas­ily sub­sti­tuted.

“In North Amer­ica the video side is de­clin­ing ... But it is a good cash gen­er­a­tor so that’s some­thing that doesn’t scare us. We have man­aged a lot of busi­nesses for cash in our past,” Ed­wards said.

Com­mS­cope shares have lost close to half their value since last April, prompt­ing the com­pany to con­sider po­ten­tial deals as an an­swer to its woes.

Ed­wards said Com­mS­cope ap­proached Ar­ris sev­eral months ago about a trans­ac­tion af­ter its board car­ried out a study on how to grow the com­pany.

Com­mS­cope, which was taken pub­lic by pri­vate eq­uity firm Car­lyle Group LP in 2013, sells con­nec­tiv­ity prod­ucts to the wire­less in­dus­try and ca­ble op­er­a­tors. Ar­ris makes modems and set-top boxes for the same in­dus­tries.

The deal comes as telecom­mu­ni­ca­tions com­pa­nies are spend­ing heav­ily to up­grade their in­fra­struc­ture to han­dle stream­ing video and get ready to roll out 5G net­works.

Reuters had re­ported about a pos­si­ble deal be­tween the two com­pa­nies last month.

Sep­a­rately, Car­lyle will also make an $1 bil­lion eq­uity in­vest­ment in Com­mS­cope for a stake of about 16 per­cent.

Allen & Co. LLC, Deutsche Bank, J.P. Mor­gan Se­cu­ri­ties LLC and BofA Mer­rill Lynch were fi­nan­cial ad­vis­ers to Com­mS­cope. Ever­core ad­vised Ar­ris. The deal is ex­pected to close in the first half of 2019.

Shares of Ar­ris were last up 10.2 per­cent at $30.63 Thurs­day morn­ing. –

‘There’s po­ten­tial for sec­tor out-per­for­mance and un­der-per­for­mance’

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