Cisco purchase to fuel revolution in TV viewing

Cisco Systems on Friday staked a $6.9 billion claim on the world's living rooms.

The San Jose, Calif.-based maker of Internet routing gear is betting that its agreement this week to purchase Scientific-Atlanta, based in Georgia, will bolster its bid to control how music, movies and other data move around the house.

Scientific-Atlanta builds set-top boxes for cable-television companies. Cisco's all-cash purchase follows its 2003 acquisition of Linksys, which makes home-networking equipment, and represents the former tech titan's biggest push into the consumer market.

Dozens of companies — from Microsoft to TiVo — are eyeing the living room as the next technological frontier. They envision the day that people will be able to call up any movie, TV program or song on the Internet and have it delivered to their stereos or televisions.

"A lot of guys are trying to come up with the home device which combines your digital music mp3s, your home videos, your TV, and maybe your cellphone," said J.P. Morgan analyst Ehud Gelblum.

Gelblum said the set-top box was a strong candidate to win in that race. It will stand a much better chance, he said, when such boxes aren't just provided by the cable companies and competition intensifies.

"A couple of years down the road and you'll be able to buy it at Best Buy," Gelblum said. "That's when the size of the market explodes."

A high-flier during the dot-com boom, Cisco built its fortune and reputation on the equipment that directs Internet traffic. But its growth slowed and its stock price slumped as Internet startups failed and demand for new gear cooled.

Nonetheless, Cisco had more than $13 billion in cash on hand at the end of its first fiscal quarter, which ended Oct. 29. That cash has enabled it to weather the downturn and make acquisitions.

Analysts said Cisco's purchase gives it the opportunity to build the same sort of infrastructure it built for the Internet — only smaller.

"The television set-top box is positioned to become the nerve system of the home network," said SunTrust analyst Chris Rowen. "This gives them better capability."

Current versions of Scientific-Atlanta boxes don't connect with Cisco's Linksys gear, but analysts said future versions could be set up to transmit information that comes in through cable lines.

Although more studios are releasing video-on-demand services over the Internet, there hasn't been a simple way to watch that material from the couch, said analyst Stewart Wolpin of Points North Group, a research firm whose clients including Comcast and Walt Disney Co.

"By putting a Net connection inside the cable box," he said, "it starts the process of making all of that content available on home televisions."

It is Cisco's largest acquisition ever in terms of head count and revenue. The company is paying $43 a share for Scientific-Atlanta — a 3.7 percent premium over its closing price Thursday. Scientific-Atlanta has about 7,500 employees and posted $1.91 billion in sales in fiscal 2005.

Scientific-Atlanta shares rose 70 cents to close at $42.15, while Cisco shares slipped 35 cents to $17.02.

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.

Scientific-Atlanta, founded in 1951, is best known for supplying the set-top boxes for cable-television operators. Its primary competitor is Motorola.

Cisco said Scientific-Atlanta will become a division of its routing and service-provider technology group.

Cisco said it expects the deal to be neutral to its fiscal 2006 earnings, while boosting its fiscal 2007 profit before items. Cisco said it will finance the transaction with cash and debt.

Information on terms of the deal provided by The Associated Press