Betting that video will drive the future of networking, Cisco Systems Inc. agreed yesterday to buy the cable television technology company Scientific-Atlanta Inc. in a $6.9 billion deal that would create a one-stop shop for sending TV over the Internet.
The acquisition is expected to help fuel the revolution in how TV is distributed and watched - a change that’s accelerating as telephone companies barge into the domain of cable operators and begin offering programming over fiber-optic networks using the language of the Internet.
It also fits Cisco’s strategy of moving into areas that are converging on the Internet Protocol standard - a shift that creates an opportunity to increase revenue with new business and enhance its traditional routers and switches that direct data over networks.
"Over the next two or three years, we are going to see a dramatic change in the landscape, where video-over-broadband infrastructure becomes the centerpiece of investments that service providers make and the expectations that consumers have," said Mike Volpi, a Cisco senior vice president.
For providers and consumers, IP television promises expanded choices, lower costs and new services in the same way voice-over-the-Internet Protocol has made phone calls less expensive and enabled features that were not possible with the traditional telephone network.
The deal also opens up opportunities for Cisco’s Linksys home networking division. Its products could be made to work seamlessly with Scientific-Atlanta boxes to distribute television throughout the home.
"We have Wi-Fi, broadband routers and other kinds of home devices which we believe can interconnect and extend the Scientific-Atlanta footprint in the home," Volpi said, "and put Cisco in the leadership not only in the network ... but also in the digital home itself."
It is Cisco’s largest acquisition ever in terms of head count and revenue. The San Jose company is paying $43 a share for Scientific-Atlanta - a 3.7 percent premium over its closing price on Thursday. The Atlanta company has about 7,500 employees and posted $1.91 billion in sales in fiscal 2005.
Scientific-Atlanta shares rose 70 cents, or 1.7 percent, to close at $42.15 in trading on the New York Stock Exchange, while Cisco shares slipped 35 cents to $17.02 on the Nasdaq Stock Market.
The deal, which was approved by the boards of both companies, is expected to close in the third quarter of Cisco’s fiscal 2006 calendar, pending closing conditions.
For Scientific-Atlanta’s business of supplying infrastructure to TV providers, Cisco’s position as the leading provider of network infrastructure will help seal deals as cable, telephone and others build and expand their networks, said Jim McDonald, Scientific-Atlanta’s chief executive.
"These customers want more complete integrated solutions from fewer vendors," said McDonald, who said he will remain with the company for two years.
Cisco also will help fuel Scientific-Atlanta’s expansion beyond cable TV companies that have been relatively slow to introduce new technologies to customers, said Josh Bernoff, an analyst at Forrester Research.
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