Sources: Cisco Eyeing Scientific-Atlanta
Several sources told Light Reading today that Cisco is one of the potential buyers, and that it's serious about it. One hedge fund source said he thinks the deal is imminent. The price? Perhaps the mid-40s per share for Scientific-Atlanta, which would put it in the range of $6.5 billion
"It's definitely happening," said the source.
Today, Needham & Co. analyst Anton Wahlman issued a research note listing 16 reasons why the two companies make a perfect fit.
Why might Cisco be the right buyer? Wahlman's 16 reasons admittedly include a few kludges (that Scientific-Atlanta's CEO is 65 isn't exactly a smoking gun for the Cisco case) but sketch an overall theme of two companies covering each other's weaknesses as television transforms into an Internet Protocol (IP) platform.
Cisco needs to be better ensconced in the home gateway to video content if it's to rule the network-happy living room of the future, says Wahlman. "We believe TV content will drive huge growth of Internet traffic, with implications for the Internet’s largest equipment vendor, Cisco," he writes. "Cisco must better understand video, quickly."
Wahlman sees Cisco now endangered by Microsoft Corp. (Nasdaq: MSFT) and Cable Television Laboratories Inc. (CableLabs), which are teaming up to connect PCs directly to cable feeds -- bypassing the cable modem and the IP infrastructure. "This move by Microsoft to turn every PC into a potential TV, in some ways cuts Cisco out of the loop," Walhman writes.
Cisco been working with IP video content providers for some time on distribution issues, and it owns a set-top box through the July purchase of Scandinavian firm KiSS Technology for $61 million. (See IPTV Security: Content Is King and Cisco KiSSes Up to Telco TV.) But some observers think the 65-employee KiSS does not match the scale of the emerging IP video market, nor Cisco’s appetite for serving it.
Scientific-Atlanta "would definitely help Cisco in this space," says Jeff Ogle, an analyst with Current Analysis. "If you look at IPTV of the future, the set-top box is going to be some kind of router."
Here's another reason this deal is possible: Yet another source told Light Reading today that Scientific-Atlanta is said to be getting some action at (NYSE: VZ) for its FioS initiative. And Scientific-Atlanta has been moving aggressively into video transport -- specifically IP-based video transport -- to tie in with its well known set-top box and home gateway offerings.
A cryptic comment from Scientific-Atlanta is helping fuel the speculation. Officials say the company wants to buy back stock but can't, due to the possession of "material nonpublic information." Many observers think that implies a pending sale. (Then again, one source asks why a company would say it plans to buy back stock if it's about to sell itself off.)
The New York Post originally reported several weeks ago that Scientific-Atlanta was on the block, and it's become common knowledge that the compay is in play. The company even shopped itself to (NYSE: ALA; Paris: CGEP:PA) but got turned down, according to Gartner Inc. analyst Patti Reali and others. Most of the talk has swirled around traditional consumer players such as Apple Computer Inc. (Nasdaq: AAPL), Panasonic owner Matsushita Electric Industrial Co. Ltd. (NYSE: MC; Tokyo: 6752), Samsung Corp., and Sony Corp. (NYSE: SNE).
The chatter is helping Scientific-Atlanta trade at a new 52-week high. The stock closed up $1.15 (2.85%) at $41.45 in trading today.
Cisco and Scientific-Atlanta officials did not immediately return calls for comment.
Some believe Scientific-Atlanta is too large, with a product portfolio too broad, to attract Cisco. The company reported $490 million in revenues for its most recent quarter, and its market capitalization exceeds $6 billion. And Cisco has recently stated that it prefers to buy smaller companies that are privately held. (See Scientific-Atlanta Reports Q1 and Cisco Says 'No Way' to Nokia Rumor.)
"This is way beyond the scope of what they want to do," says Sanjiv Wadhwani, an analyst who follows Cisco for Miller Johnson Steichen Kinnard Inc. "Obviously, there are certain aspects of that business that really would be interesting, because in the overall digital home scenario, there are elements Scientific-Atlanta would provide them. But there's too much that comes with that."
"I have a side bet with Anton [Wahlman] that this will not happen," says Jim Olson, CEO of cable equipment vendor SkyStream Networks Inc. "I just don't see Cisco taking on something as diverse as SA. It would be very surprising to me. That said, there must be some insider info floating around lending credence to the prospect."
Whether or not this particular deal comes to pass, plenty of folks in the banking community see plenty of action in the video market, given all the changes forced by digital content distribution.
"There will be more consolidation in the video ecosystem," says Henry Matthiessen, Managing Partner with Mooreland Partners, a small investment bank. "Everything from chips, set-top boxes, middleware, and transport."
— Craig Matsumoto, Senior Editor, R. Scott Raynovich, US Editor, and Mark Sullivan, Reporter, Light Reading