Cisco to Buy Scientific-Atlanta for $6.9 Billion

The acquisition, one of Cisco’s largest ever, will vault the routing and switching equipment giant into a leading role in the digital video transmission business at a time when cable operators are switching to all-digital systems and phone companies are building video networks. S-A, the 2nd-biggest manufacturer of cable set-top boxes and video headends, commands about 40% of the market in a longstanding duopoly with Motorola. Its biggest customers are Time Warner and Cablevision.

In conference calls with analysts and reporters, senior Cisco and S-A executives said the deal will enable the combined company to offer complete “quadruple play” packages of data, voice, video and mobility services to both cable operators and phone companies. Like archrival Motorola, S-A has been trying to crack the emerging telco IPTV market for some time. But, even though it landed SBC as a major equipment customer this year, S-A has largely struggled to expand beyond its strong base of cable customers because of its lack of contacts in the phone industry. Cisco, on the other hand, has strong relationships with many telecom players.

“As the phone guys enter the market, we're losing deals because we don’t have a history with them,” said S-A Chmn. Jim McDonald, who has pledged to stay on for 2 years after the deal closes early next year: “And in international markets, we don’t have relationships either. We have things we can sell them, but we just don’t have the relationships with the customers.”

Cisco and S-A officials also stressed that the combined company will be able to offer end-to-end video solutions to broadband providers around the world. Although Cisco already enjoys worldwide reach and has become a leading player in the cable data and VoIP business, it hasn’t had video products to offer along with its portfolio of data, voice and mobility services.

“Video is emerging as a key element in the service provider bundle,” said Cisco CEO John Chambers, whose company now generates about $1 billion in sales from cable operators for its routing and switching gear: “This will reduce the complexity of merging video, voice and data over IP networks.”

Officials from both companies also see great possibilities for integrating S-A’s portfolio of digital set-top boxes, transmission networks, headends, cable modems and voice modems with Cisco’s home networking capabilities. They noted that S-A, a pioneer in developing multiroom digital video recorders (DVRs), will be able to combine its expertise with Cisco’s Linksys home networking division to zip video around the home and onto portable media devices.

S-A and Cisco executives also see strong potential for international expansion, particularly on the S-A video end. While Cisco generates close to 60% of its revenue outside the U.S., S-A earns no more than 25% of its revenue outside N. America. Cisco officials see promise for growth particularly in such regions as southern Europe and Asia.

Although both companies have plenty of cash stockpiled, Cisco and S-A have been under pressure to boost sales and earnings. S-A reported last month that its fiscal first-quarter net income grew 9% to $60.7 million. But its sales of $490 million didn’t meet Wall Street’s expectations. Cisco reported earlier this month that its fiscal first-quarter profit slid, and it forecast weaker-than-expected sales in the 2nd quarter.

Industry analysts largely praised the deal Fri. They said it should boost Cisco’s cable sales and catapult it into the developing telco IPTV market. Chambers said he’s looking to lift S-A’s growth from the current 10-12% to 12-16%.

Competitors, however, downplayed the merger’s impact. In a prepared statement, Motorola noted that it entered the advanced video market nearly 6 years ago when it bought cable equipment manufacturer General Instrument, S-A’s old chief rival. “As Cisco just begins integrating video into its core networking and routing portfolio, Motorola solutions are extending far beyond the ’triple play,'” Motorola said.