Jones Lang LaSalle

November 18, 2005
Cisco Agrees to Acquire TV Set-Top Box Maker

By MATT RICHTEL and KEN BELSON

Cisco Systems Inc., the Internet equipment provider, said today it had reached a deal to buy Scientific-Atlanta, a maker of television set-top boxes, for $6.9 billion.
The news highlights a desire by networking equipment makers to take advantage of the growing convergence of Internet technology, telecommunications and entertainment.
Cisco will pay $43 per share for each share of Scientific-Atlanta, a 3.7 percent premium over than the stock's closing price on Thursday, the companies said in a statement. Cisco will use cash and debt to finance the transaction. Scientific Atlanta's $1.6 billion cash balance means Cisco will end up spending $5.3 billion.
In the last month, Scientific-Atlanta's stock has surged 26 percent on speculation that the company would be bought. Those gains have pushed the company's market capitalization to $6.4 billion.
Scientific-Atlanta's stock rose $1.15, or 2.9 percent, to $41.45 Thursday. Cisco's shares rose 15 cents, to $17.37.
Cisco said the deal had been approved by the boards of both companies, but it still faces a review by antitrust regulators, and shareholders of Scientific-Atlanta must vote on it.
With the deal, Cisco will, for the first time, be able to sell digital television equipment that provides high-definition programming; shows and movies on demand; and an array of interactive services. Scientific-Atlanta, the second-largest provider of these set-top boxes, and Motorola, the largest, have effectively held a duopoly in this market.
"Video is emerging as the key strategic application in the service provider triple play bundle of consumer entertainment, communication and online services," John Chambers, Cisco's president and chief executive officer, said in the statement.
Both Scientific-Atlanta and Motorola have long supplied set-top boxes to cable operators like Comcast and Time Warner Cable. The boxes, though long viewed as stodgy decoders of encrypted television signals, have become far more sophisticated in recent years.
Scientific-Atlanta and Motorola now produce boxes that receive high-definition programs and include digital video recorders; soon they will include DVD recorders as well.
Cisco is envisioning a future that includes home entertainment systems built around a set-top box that communicates with not only the television, but also with audio equipment and a range of appliances. Cisco also sees potential growth in services that store television programming on giant servers for delivery to consumers on demand.
Scientific-Atlanta is also likely to benefit from a requirement that broadcasters return their analog spectrum to the government in 2009. By then, hundreds of millions of American televisions will need the equipment to receive digital signals.
"One of the nice things about set-top boxes is that they are constantly being overhauled," said Bruce Leichtman, president of the Leichtman Research Group, which tracks the telecommunications and cable industries. "The cycle never ends."
A purchase of Scientific-Atlanta would be a coming-out party of sorts for Cisco as a more consumer-oriented company. The company has been best known for equipment that routes data around the Internet. These so-called routers have turned Cisco, with $24 billion in annual sales, into a bellwether stock.
Cisco made its biggest push into the retail market so far in 2003, when it acquired Linksys, a big maker of Internet routers for the home, for $500 million.
Still, any deal carries considerable risk for Cisco shareholders. The question of how digital equipment will merge with digital entertainment remains up in the air. As a result, there is no assurance that Scientific-Atlanta can retain its dominant position in the set-top box market.
In the late 1990's Cisco made a similarly big push into the telephone equipment market when phone companies new and old were spending billions on Internet and related equipment. That effort, which depended far more on acquisitions of small start-up companies, had mixed results and it took Cisco some years to break into the nation's large regional phone companies.
In acquiring Scientific-Atlanta, based in Lawrenceville, Ga., Cisco is buying a much bigger and more established company with 6,500 employees and $1.9 billion in annual revenue. Almost all its profit comes from sales of set-top boxes and related equipment.
Cisco, which is based in San Jose, Calif., has 34,000 employees.
The deal ends a great deal of speculation about Scientific-Atlanta's future. The company's president, James F. McDonald, is said to be nearing retirement, and the company, which has ample cash, has largely avoided any acquisitions.
In the statement, Cisco said Mr. McDonald would stay with the company and report to Michelangelo Volpi, a senior vice president who has overseen dozens of acquisitions at the company.
Private Capital Management, run by Bruce S. Sherman, is Scientific-Atlanta's largest shareholder, with 18.2 million shares, or an 11.8 percent stake.
Vikas Bajaj contributed reporting for this article.