Cisco to Buy Scientific-Atlanta for $6.9 Billion

Cisco Systems Inc. is targeting the digital home market with its announcement Friday morning it plans to buy video infrastructure giant Scientific-Atlanta Inc. for approximately $6.9 billion, or $43 per share.

“There’ve been some rumors about this going around for a couple weeks or a month or so, so in terms of the timing, it’s not so much a surprise,” says Steve Nozik, principal analyst for the broadband access program at research firm Dell’Oro Group. “It’s a bit surprising because it’s not the typical Cisco acquisition,” he adds, explaining the vendor usually acquires smaller or start-up companies on the West Coast. Scientific-Atlanta is a $1.7 billion company headquartered in Georgia.

Michael Howard, principal analyst and co-founder of Infonetics Research, concurs the acquisition is Cisco’s largest since it bought Linksys two years ago. “In this case, Cisco is investing into an adjacent market, buying both market share and technology in the hot IPTV market, which we forecast to reach $44 billion and 53.7 million subscribers worldwide by 2009,” Howard says. “With Scientific-Atlanta's cable set-top boxes, Cisco strengthens their position in the service provider video market with both cable and telco providers. Video is the killer app of triple-play, and mobility is the killer app of quadruple play. Cisco now has both.”

When the transaction closes next spring, Scientific-Atlanta will become a division of Cisco’s Routing and Service Provider Technology Group, led by Senior Vice President Mike Volpi. Jim McDonald, chairman, CEO and president of Scientific-Atlanta, will report to Volpi.

Nozik says Cisco sees video over IP as a growth market. “[T]hat’s the way the telco service providers are planning to roll out their video offerings,” he notes. “I think [Cisco sees] that the future of video is over IP and they want to be in that space.”

Indeed, John Chambers, president and CEO of Cisco, points to just that strategy in his statement announcing the acquisition.

"Video is emerging as the key strategic application in the service provider triple-play bundle of consumer entertainment, communication and online services," Chambers said in the news release. "As consumers demand more sophisticated information and entertainment services in their home, tightly coupled applications, devices and networks will be essential. The collective strength of Linksys and Scientific-Atlanta will extend Cisco's leadership position across the entire networked digital home."

Scientific-Atlanta has platforms and technologies that scale to millions of subscribers. Coupled with the Cisco IP Next Generation Network architecture, the companies say they will offer providers an open platform that allows them to move beyond video/IPTV to develop and deliver various integrated media services in the “digital home.”

Telecom industry analyst Jeff Kagan says the acquisition, which has been approved by the boards of directors of each company, makes sense.

“[S]et-top boxes are evolving and getting into phone and Internet and all the other advanced features the companies will need to compete with each other,” he explains. “This deal with Scientific-Atlanta will give Cisco the reach they need into the homes and offices to roll out new services in coming years.”

The CEO of BigBand Networks Inc., a provider of broadband multimedia infrastructure for video, voice and data, says the buyout points to the rising importance of triple-play hardware.

“One of the interesting elements of this acquisition is the differences in each company’s approach,” says Amir Bassan-Eskenazi. “Cisco has consistently leveraged IP networking standards, while Scientific-Atlanta has gained its market share through more proprietary, closed system practices such as its conditional access methodologies. Reconciling such ideological differences will be fascinating during integration efforts.”

Dell’Oro’s Nozik agrees that bringing the two companies together will be a challenge, especially given their sizes. “The integration issues will be great,” he says. But, he adds, the deal “does fill in some of [Cisco’s] product applications, so in that respect it seems like it’s a good move.”

Cisco shares were down 37 cents per share on the news Friday morning. Shares of Scientific-Atlanta stock rose 57 cents.

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