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Harmonic to acquire Omneon to target evolving media landscape
5/7/2010

As professional video technology vendors try to figure out their future growth paths, the combining of encoding (compression), transcoding (format conversion) and infrastructure products seems to be a good strategy to address the expected future growth of video consumption, across all delivery platforms and among a wide variety of users.

Such was the thinking behind the announcement that Harmonic has agreed to acquire video server provider Omneon for approximately $274 million in cash and Harmonic stock. The two companies, each well known for their respective technology offerings, had been discussing a merger for several months, with negotiations heating up in earnest since March.

The proposed acquisition, which is expected to be finalized in Q3, would combine Harmonic’s video delivery infrastructure products with Omneon’s technology for the production, management and distribution of digital media, resulting in a business with more than $500 million in annual revenues (more than half coming from outside of the United States). The combined company would allow content providers to deliver more video to consumers around the world, on any device and in any format.

“These kinds of courtships always take a bit of time when you are talking about putting companies together,” said Geoff Stedman, senior vice president of marketing and business development at Omneon. “There’s been a lot of discussion about how the two companies would work together, and once we arrived at a consensus the deal quickly fell into place. We think there are a lot of synergies, and to both parties this makes a lot of sense.”

Indeed, under the acquisition, Omneon would benefit from Harmonic’s extended worldwide dealer network and extensive product portfolio with which to design next-generation infrastructures, while Harmonic gets a proven server vendor with a modular platform that can be configured to target a number of different industries.

Over the past 10 years, Harmonic has shown a willingness to acquire companies that fit its strategy of serving the need to move video around facilities and around the world, both for professional and consumer consumption. In 2000 it acquired DiviCom’s compression business from C-Cube, in 2006 it purchased Entone Technologies' video networking software business to support video-on-demand services, and in 2007 it bought Rhozet to add multiformat transcoding with watermarking and fingerprinting capabilities to its portfolio.

“Media companies are being driven by ever-increasing demand for video content coupled with consumers’ desire to consume video anytime and anywhere,” said Patrick Harshman, president and CEO of Harmonic. “At the same time, the dramatic growth of video delivery over broadband and wireless networks is blurring traditional boundaries between content producers and service providers. With our deep customer relationships with content producers and service providers, and with our market-leading technologies that span content acquisition through delivery, we believe that our combined company will be uniquely positioned to capitalize on these trends and to accelerate revenue growth.”

Combining forces with Harmonic should help Omneon increase market share at a faster rate than it perhaps could organically.

“Besides the increased access, we get to a wider customer base than we now serve. I also think there’s a benefit in terms of being able to leverage each other’s technology in ways few other vendors can provide,” Stedman said, adding that the combined companies will have an R&D workforce of over 450 employees located around the world and a budget of over $9 million.

“We’re looking forward to taking a look at some of the work that Harmonic has done and potentially create the next generation of video infrastructure by putting some of our technologies together,” he said.

Harmonic has been focused on the service providers while Omneon has targeted the content provider (including broadcasters). One of the broader market trends occurring within the industry is the overlapping of those two worlds. Broadcasters are distributing content directly to the consumer; Comcast is looking to get into the content ownership by buying NBC Universal.

“We’re seeing the lines between our two sets of customers begin to blur, and it has created an opportunity for the underlying technology to evolve to support these large media organizations that truly want to do it all, across multiple platforms,” Stedman said. “We see this merger as a way to set ourselves up as a leader as this evolves.”

The merger will allow Omneon to reach scale and do more things with its technologies by reaching different types of customers.

The current Omneon management team will remain intact, as Omneon will continue to operate as a separate business unit within Harmonic, although current Omneon CEO Suresh Vasudevan will now assume the role of president and answer to Patrick Harshman. Stedman will continue to focus on marketing Omneon products exclusively.

The Omneon brand will remain, at least for the immediate future, according to both companies. For the year ending Dec. 31, 2009, Omneon’s revenues were approximately $105 million, of which 67 percent were outside the United States, with no single customer representing more than 10 percent of total revenue. (Omneon’s gross margin was 58 percent in 2009.) The company has approximately 280 employees worldwide, and is headquartered in Sunnyvale, CA, with research and development facilities in Sunnyvale and Beaverton, OR. Harmonic is also headquartered in Sunnyvale, with R&D, sales and system integration centers worldwide.

The products and solutions of the combined company are deployed at some 2000 users across more than 100 countries, for broadcast and on-demand video services delivered via cable, satellite, telco, terrestrial, broadband and mobile networks. The company will have a combined global sales and service organization of 330 people and a network of over 250 global sales channel partners.

Under the terms of the definitive agreement, which has been approved by the boards of directors of both companies, Harmonic will pay $190 million in cash and issue approximately 17.1 million shares of its common stock. This represents an enterprise value of approximately $274 million, based on the closing price of Harmonic common stock on May 5 and is net of Omneon’s cash balances, which are expected to be approximately $32 million at closing.

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