Sources: Cisco Eyeing Scientific-Atlanta

With set-top box vendor Scientific-Atlanta Inc. (NYSE: SFA) reportedly up for sale, some sources in the financial community think it's found the perfect buyer: (Nasdaq: CSCO).

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

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paolo.franzoi 12/5/2012 | 2:53:42 AM
re: Sources: Cisco Eyeing Scientific-Atlanta
Cerent was a success?

The optical group bleeds money and has never come close to paying back the money spent on it. It was also a tiny acquisition from a company standpoint. Cerent had $10M in revenue when they received the $6.9B check.

$20 says this is bankers trying to force something to happen.

naturalwonders 12/5/2012 | 2:53:42 AM
re: Sources: Cisco Eyeing Scientific-Atlanta One of the most awesome things about Cisco
has been its Borg-like ability to swallow up and integrate small nimble startup technology into the companies products. If I'm not mistaken the largest aquisition they ever did was the Stratacom and Cerent aquisitions. I believe Stratacom was troublesome and the Cerent one was a sucess.
Merging with Scientific Atlanta would be by far
their biggest merger yet and would be interesting to see if they can pull it off.

Both companies are being forced to act fast to stake a position in the rapidly emerging IP Video enviroment.Particularly as services rapidly get sucked back into the network away from the equipment and pipe providers. First Skype provided a giant VoIP wakeup sucking sound now IP based video is poised to do the same. Call this the Google/Itunes effect. Perhaps it is one of the reasons that Google $112bn market value just edged past Cisco.

At the end of the day Cisco is just one of many companies gear companies that makes the information age rails,ties, and rail cars.

The creators of the value added services on top of this infrastructure are the ones that stand to win.If Cisco can somehow do this by combining with SA then more power to them.

naturalwonders 12/5/2012 | 2:53:42 AM
re: Sources: Cisco Eyeing Scientific-Atlanta I was speaking less towards product
success and more towards the two companies cultural integration. From a cultural standpoint I think part of Cisco's success up to this point has been to buy
smaller like minded and focused companies. Another factor is size integration HP and Compaq come to mind- these big mergers are not easy.

I agree this is more some bankers wet dream than actuality.
o-man 12/5/2012 | 2:53:41 AM
re: Sources: Cisco Eyeing Scientific-Atlanta MOT

MOT needs a good transport team...
Pete Baldwin 12/5/2012 | 2:53:41 AM
re: Sources: Cisco Eyeing Scientific-Atlanta Good points about Cisco and acquisitions.

Who makes the best fit with SA, though? In a perfect world, who ought to be buying them?
sjd6 12/5/2012 | 2:53:40 AM
re: Sources: Cisco Eyeing Scientific-Atlanta I agree with what fiberous said.
I used to work with a startup that (tried) to do
business with SA. What a mess.
It will be a disaster if cisco buys them.
PacketProtector 12/5/2012 | 2:53:40 AM
re: Sources: Cisco Eyeing Scientific-Atlanta http://www.nytimes.com/2005/11...

fiberous 12/5/2012 | 2:53:40 AM
re: Sources: Cisco Eyeing Scientific-Atlanta SA's biggest footprint is in subscriber units.
There transport portfolio has not kept up with
advancements and the only sale is when there is
a relationship made by a hug sale of subscriber
units. SA is a very accounts strategy driven
company. Although, their ampifiers are still
considered as a reference today in the industry.

SA's culture will be a hard one to assimilate.
The good old Georgian Boys Club knows how to
keep their clan intact. A west coast compnay
will find this the hardest.

However, SA has the best encryption scheme
available for Cable today. Proprietary, but
still hard to break and has been their main
selling point.

Unless Cisco wants to get into the subcriber
unit side I dont see much of a value here,

I certainly see mergers with C-cor and other
similar companies benefiting these folks because
of the commodization and thinning margins.
naturalwonders 12/5/2012 | 2:53:39 AM
re: Sources: Cisco Eyeing Scientific-Atlanta The NY Times said it was approved after the close of the market today. From another analysis it makes sense as MSoft is muscling into the IPTV market. This will allow Cisco a huge footprint in the very attactive CATV market.I would expect to see the Telcos gravitate towards MSFT IPTV and of course Motorola.
gotman 12/5/2012 | 2:53:39 AM
re: Sources: Cisco Eyeing Scientific-Atlanta This could be another linksys, i wouldn't be too
concerned about the cultural integration issues, its just an arm, the joints shield any negative culture between both team!
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