Cisco Systems Inc., known mostly for its networking hardware that moves Internet traffic around, jumped into the consumer video market yesterday, announcing that it would pay $6.9 billion for set-top-box maker Scientific-Atlanta Inc.
Set-top boxes, made primarily for cable and satellite television providers, are becoming home-entertainment hubs for a growing number of digital video services. In addition to translating programming signals into pictures on the television screen, the boxes serve as digital video recorders and on-demand gateways, with DVD burners and connections for computers and gaming consoles on the horizon.
For Silicon Valley-based Cisco, the purchase builds on a strategy to push beyond the business of making the core routers and switches that consumers rarely see. That market made Cisco a powerhouse as the Internet boomed, but growth is now slowing.
In June 2003, the company purchased Linksys Group, which makes wireless and wired home-networking equipment, and Cisco is one of the oldest providers of voice over Internet telephony products for businesses.
Now, said Cisco chief executive John T. Chambers, the company is poised to be a leader as digital voice, data, video and portable technology become central to life in the 21st century home.
"This completes a large part of [that] quadruple play," Chambers said on a conference call with media and financial analysts.
James F. McDonald, chief executive of Georgia-based Scientific-Atlanta, said Cisco's resources and wide set of customers would help it break into new markets.
For example, he said, telephone companies are beginning to install fiber-optic networks into homes, offering Internet data, phone and digital television service.
"We've lost deals because we didn't have the ongoing relationships with the phone guys," McDonald said. "Cisco already has those relationships."
Although it trails Motorola Inc. in the set-top-box market, Scientific-Atlanta is a leader in video transmission networks and research, a critical component of the deal for Cisco, Chambers said.
Cisco is paying about $43 a share for Scientific-Atlanta, a premium of about $10 a share over where the stock stood when word started circulating about the deal late last month. Because Scientific-Atlanta has about $1.6 billion in cash, the net value of the deal is about $5.3 billion.
The companies made no mention of consolidating employees or other resources, and the Scientific-Atlanta executive team committed to staying with the company for two years.
Although some analysts questioned how well Cisco could integrate such a large acquisition, others praised the deal.
Video "is where a ton of growth is going to be," said digital media analyst Rob Sanderson of American Technology Research.
"We've gone a long way on broadband Internet in the home, but it only takes you so far," he said.
"To get it into high gear, you have to solve the riddle of video distribution."