Why ARRIS International Stock Surged Today

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What happened

Shares of ARRIS International (NASDAQ:ARRS) have surged today, up by 10% as of 1:30 p.m. EST, after the company reported third-quarter earnings. However, the results weren’t too relevant as the company also announced it was being acquired.

So what

Revenue in the third quarter was $1.65 billion, which led to non-GAAP earnings per share of $0.68. The more significant announcement was that CommScope (NASDAQ:COMM) will acquire ARRIS for $31.75 per share in a transaction valued at $7.4 billion including debt. The Carlyle Group will also invest $1 billion in CommScope, after dissolving its stake in the company in 2016. Carlyle had previously acquired CommScope in 2011 before taking it public again in 2013.

CommScope plus ARRIS logos

Image source: BusinessWire.

“After a comprehensive evaluation of our business and the evolving industry we operate in, we are confident that combining with ARRIS is the best path forward for CommScope to grow and provide the greatest returns for shareholders,” CommScope CEO Eddie Edwards said in a statement. “CommScope and ARRIS will bring together a unique set of complementary assets and capabilities that enable end-to-end wired and wireless communications infrastructure solutions that neither company could otherwise achieve on its own. With ARRIS, we will access new and growing markets, and have greater technology, solutions and employee talent that will provide additional value and benefit to our customers and partners.”

Now what

CommScope investors are skeptical of the deal, sending shares down by 24% as of 1:30 p.m. EST, potentially due to concerns around how the deal is being financed. CommScope will take on an additional $6.3 billion of incremental debt to finance the deal, in addition to cash on hand. In an interview with Reuters, Edwards brushed aside debt concerns, saying, “Leverage is something that we have dealt with in our past several times with the acquisitions that we have done. It’s something we are used to and we know how to take cost out of the businesses as we acquire them.”

CommsScope and ARRIS hope to ramp up cost-saving synergies within three years of the deal’s closing. The combined company hopes to save $60 million in the first year, $125 million after the second year, and $150 million annually thereafter. The deal is expected to close in the first half of 2019.

Evan Niu, CFA has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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