Cisco Charts Route Out of Router Rut
In one $5.3 billion swoop to acquire Scientific-Atlanta, Cisco grabs a whole new video infrastructure market to play in, and with it relief from the confines of its stagnant business-networking rut.
For Scientific-Atlanta, it's obviously a sweet hookup with the world's leading Internet gearmaker, and a big door opener to international sales channels.
While industry observers see the big picture technology fit, the deal didn't receive a great reception on Wall Street Friday. Scientific fans felt shortchanged on the premium and Cisco watchers smelled a slight whiff of desperation in the move."Investors are going to question the strategy in the near term," says one hedge fund manager who is long SFA and has no Cisco position. Cisco shares fell 38 cents to $16.99, and Scientific, after rising 23% over the past month on deal speculation, was up 68 cents to $42.13 at midday. Some analysts say Cisco got a steal with the deal priced at $43 a share in cash. Fans say Scientific is a profitable venture with a potentially huge growth market ahead as phone companies and cable shops square off over advanced digital service offerings like video-on-demand and high-definition programming. By Cisco's estimates, Scientific will have a neutral impact on earnings this year and contribute in fiscal 2007, which starts in July. But analysts like J.P. Morgan Chase's Ehud Gelblum say that contribution could be "north of $1" a share next year. Scientific is the No. 2 supplier of video networking gear and set-top boxes to cable companies. Rival Motorola (MOT), through its acquisition of General Instrument, is No. 1. Both Motorola and Scientific are vying for contracts with phone companies that have plans to offer video-over-the-Net, or IPTV.
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