Moving into position to add cable-quality video to the voice, data and wireless services that its products help telecoms and other companies provide, Cisco Systems said it will buy cable equipment maker Scientific-Atlanta in a deal worth US$6.9 billion.
Cisco will pay $43 per share in cash in exchange for each share of Scientific-Atlanta, which has about $1.6 billion worth of cash on hand, giving the acquisition a net price of about $5.3 billion. That still makes it Cisco’s largest since it bought switch-maker Stratacom for $5 billion in 1996.
Scientific-Atlanta, the second largest cable systems maker, has been known to be on the sales block for some time. And in recent days, Cisco has emerged as the top suitor.
Cisco said the move would create an “end-to-end triple play solution for carrier networks and the digital home” that combines voice, data and video.
“Video is emerging as the key strategic application in the service provider triple play bundle of consumer entertainment, communication and online services,” Cisco CEO John Chambers said in a conference call. He said that the company sees numerous “strategic synergies” that will lead to new growth for Cisco.
“As consumers demand more sophisticated information and entertainment services in their home, tightly coupled applications, devices and networks will be essential,” he added.
The Scientific-Atlanta technology will also be aligned with Cisco’s Linksys home networking products, enabling Cisco to have a role in both ends of the delivery of blended bundles of services into the home.
Into the Fray
The move comes as the line between traditional media and the Internet continue to blur further, with television networks moving content onto the Web and telecom players entering the television delivery business.
Cisco is buying a company that is much older than itself. Scientific-Atlanta was formed in 1951 and held an IPO in 1959. It has about 7,500 employees, most of whom will retain their jobs until the integration of Scientific-Atlanta, which will come after the deal passes anti-trust reviews and is approved by shareholders on both sides.
Telecom analyst Jeff Kagan told the E-Commerce Times the deal, which would have seemed surprising as recently as a year ago, now fits with the altered telecommunications landscape.
“This deal makes sense as telecom continues to change,” Kagan said. “As telephone companies and cable TV companies gear up to compete, its all about the broadband line and all the services they can deliver to customers in all the different ways. One key way of offering service is over the broadband connection to the home and office, delivering telephone, television and Internet. That’s what this deal addresses.”
Kagan said the set-top boxes that Scientific-Atlanta makes are already beginning to come equipped with additional capabilities, an evolution that will accelerate with this merger, bringing together phone, traditional video, IP video and other interactive services.
“Cisco wants a company that can give them a foot in the door to deliver all these services to all these customers,” he added. “This deal makes sense as a pre-emptive strike.”
Jupiter Research analyst David Schatsky said the deal rests on the idea that video will become the primary driver for faster bandwidth among service providers and that “IPTV is the future, a future of TV as we can barely imagine it today — more personalized, more flexible, more on-demand.”
The move seems to open new growth areas for Cisco at a time when its traditional base of telecom providers and corporations with large, complex networks is starting to resume spending again after the telecom crash.
Earlier this month, Cisco reported lower third quarter earnings, but said it still expected to be able to maintain double-digit revenue growth in coming years.
Whether it will translate immediately into stock gains is unclear, but Kagan expects Cisco will be at the forefront of the evolution of the digital home now that its has the cable box maker in the fold.
“I don’t expect news immediately, but as they work together I expect this will be a high profile company to watch,” he said.