Cisco buys set-top box maker for $6.9bn

Cisco Systems, the world’s biggest maker of internet routing and switching equipment, on Friday moved to seize control of the digital home with a $6.9bn deal to buy Scientific-Atlanta, a US maker of cable television boxes.

The all-cash deal would set the stage for Cisco to offer a platform that combines digital video, telephone, data and wireless services across a single network inside the home.

Cable and telecoms groups expect demand for such services to drive a new wave of growth in data services as increasing numbers of households link up connect to the internet via faster broadband connections. Computer makers and software companies are also seeking ways into the digital home.

“Video is emerging as a key element,” said John Chambers, Cisco’s chief executive. “The opportunity for Cisco is to dramatically reduce the complexity of converging data, voice and video over IP in both a fixed and mobile environment.”

Ragu Gurumurthy, analyst at Adventis, a telecoms and IT consultancy, said the deal would be “phenomenal” for Cisco, which has been struggling to meet growth targets amid flagging sales of its core routing and switching equipment.

“[Cisco’s] penetration of the service provider market over the last five years has been mediocre at best,” said Mr Gurumurthy. “This is the right move for them.”

However, one analyst said Cisco’s offer price could leave the deal open to rival bids. Ehud Gelblum, at JP Morgan, said in a research note that Cisco’s offer price of $43 per share was “much too low”. Cisco’s offer represented a premium of more than 20 per cent above the company’s share price before news that it was for sale began to emerge late last month.

“At this price point we would expect other bidders to be interested and surface, including large consumer electronic companies, telecom equipment vendors and large software players interested in home media entertainment,” Mr Gelblum wrote. One such company could be Motorola, Scientific-Atlanta’s chief rival in the set-top cable box market.

Scientific-Atlanta is the second-largest maker of set-top boxes that allow
consumers to digitally record television broadcasts for viewing at their chosen time. Strong demand for such services has forced television networks to re-think business models based on viewing hours and advertising viewership.

It comes on the heels of growth in voice-over-internet telephony and wireless technologies.

Ned Hooper, Cisco’s senior director for business development, said the deal would produce $1.9bn in new revenues next year. However, Cisco said it was not likely to have an impact on 2006 earnings.

The deal will be financed through a combination of cash and debt.

Shares in Scientific-Atlanta rose 1.7 per cent to $42.15 on news of the deal. Cisco’s shares fell, ending the day 2 per cent lower at $17.02.