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Cisco Buys Maker of TV Set-Top Equipment

Posted on: Sunday, 20 November 2005, 12:00 CST

By Matt Richtel and Ken Belson

Cisco Systems, a provider of Internet equipment, on Friday announced its acquisition of Scientific-Atlanta, a maker of television set-top boxes, for $7 billion

The final cost of the acquisition is expected to be around $5.3 billion because Cisco expects to acquire a cash balance of around $1.7 billion from Scientific-Atlanta.

In the past month, the stock of Scientific-Atlanta has surged 26 percent on speculation that it would be bought. Those gains have pushed the company's market capitalization to $6.4 billion.

The news highlights a desire by equipment makers to take advantage of the growing convergence of Internet technology, telecommunications and entertainment.

With the deal, Cisco will for the first time be able to sell digital television equipment that provides high-definition programming, along with shows and movies on demand as well as 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.

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 said it was 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 has said it 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 Leichtman Research Group, which tracks the telecommunications and cable industries. "The cycle never ends."

The purchase of Scientific-Atlanta is 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 routers have turned Cisco, with $24 billion in annual sales, into a bellwether stock.

The company made its biggest push into the retail market until now in its 2003 purchase of Linksys, a big maker of Internet routers for the home, for $500 million

Scientific-Atlanta, based in Lawrenceville, Georgia, has 6,500 employees and $1.9 billion in annual revenue. It earns almost all of its money from sales of set-top boxes and related equipment. Cisco, which is based in San Jose, California, has 34,000 employees.

The deal ends a great deal of speculation about Scientific- Atlanta's future. Its president, James McDonald, is said to be nearing retirement, and the company, which has ample cash, has largely avoided making acquisitions.

People briefed on the negotiations said Scientific-Atlanta would retain its current management.

Private Capital Management, run by Bruce Sherman, is Scientific- Atlanta's largest shareholder, with 18.2 million shares for an 11.8 percent stake.

Source: International Herald Tribune

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