Cisco buys SA for $6.9 billion

Cisco Systems’ $6.9 billion acquisition of Scientific-Atlanta positions that company to be an end-to-end provider of IP video to cable and telephone companies globally, Cisco Chairman and CEO John Chambers said today. The addition of set-top box capability, combined with Cisco’s Linksys wireless operation, also positions the data networking giant to become a major force in the home entertainment market.

“This completes a large part of our quadruple play,” Chambers said in a morning press conference. Cisco had pledged to be a leader in the merging data, voice and mobility markets and is now making “a major move in adding fourth element of video,” he commented. “This immediately positions Cisco as end to end in the digital video market which we expect to be a $10 billion market opportunity by 2009. We now have a more complete portfolio for the digital home. We will have a unified home network with SA set-top boxes and Linksys network entertainment products which we believe puts Cisco in a unique position.”

While initially SA will continue to operate separately – including its Juarez, Mexico manufacturing facility – Chambers made it clear that the company’s technology will be tightly woven into Cisco’s IP infrastructure, and combined with the Linksys WiFi ability to create a home IP networking-entertainment platform. By keeping SA separate initially, Cisco hopes to maintain momentum and growth and retain SA's key people, Chambers said.

“Intelligence will be distributed throughout the network and the network will be platform of the future,” the Cisco CEO commented. “Layers one through seven of the network stack will be loosely and then tightly couple together. There will be intelligence, applications, processing, storage and services throughout the network and this acquisition extends our commitment and leadership in the service provider and consumer segments.”

The acquisition will put major pressure on other players in all segments of the industry, including Alcatel, Motorola and even Microsoft, as it positions its IPTV system. SA holds 40% of the U.S. cable set-top market, and has landed one major telco – SBC Communications – as an IPTV player.

The largest missing piece in that end-to-end play is access, where Alcatel holds a dominant position with most of the largest carriers. However, according to Mike Volpi, senior vice president of Cisco, the access part of the end-to-end solution doesn't hold as many growth prospects as CPE and transmission, where S-A is strong.

"I think [access] is a market segment that isn’t observing as much of a transition," he said. "What we’ll look to do is partner. In DSL, there’s clearly an established set of players that we’ll look to work with. Also remember that access is varied. In telcos, they're clearly going with DSL. In DOCSIS [the dominant cable access technology] we have a very strong market share and SA bolsters that position."

In the emerging fiber-to-the-prem market, Volpi noted that the company was still observing the market and would look to partner with others.

SA had signaled its availability by hiring investment bankers – a fact reported by the New York Post two weeks ago, triggering a run-up in the company’s stock. President and CEO Jim McDonald, who will remain with Cisco for at least two years, said his firm “needed greater scope and resources to capture the opportunities in the expanding market.”

One immediate place for expansion of SA sales is internationally, he added.

“We don’t have the long historical relationship [with telcos],” said McDonald, who admitted losing one major deal as a result. “We don’t have the relationships to carry the switched digital video market internationally. We don’t have the telephone relationships. Clearly, that’s an area where we can get a lot of acceleration. We have things we can sell them.”

Cisco said Scientific-Atlanta shareholders would get $43 each for their shares or a 4% premium on where the stock was trading Thursday, and the company will assume outstanding options as well. SA shares have been on the rise for the past two weeks, ever since it was reported that the cable gear-maker had hired investment bankers to explore its sale possibilities.

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