Cisco's Chambers Sees Bigger Software Focus After NDS Deal
March 16 (Bloomberg) -- Cisco Systems Inc. Chief Executive Officer John Chambers says he intends to make software a bigger focus after the company agreed to buy NDS Group Ltd. for about $5 billion to tap demand for next-generation video services.
The company is "moving to a more software-based model," Chambers said yesterday, as San Jose, California-based Cisco announced its biggest acquisition in six years and its first major purchase since beginning a turnaround plan last year to improve profitability.
Cisco, the largest maker of equipment for computer networks, will get software from NDS that operates in millions of homes, running cable set-top boxes, powering digital video recorders and enforcing copyright restrictions that prevent piracy. The company, which has about $46.7 billion in cash and cash equivalents in the U.S. and overseas, has pledged to be aggressive in technology acquisitions.
"I think that's where they need to be," Matt Robison, an analyst with Wunderlich Securities in San Francisco who recommends buying the stock, said in an interview. "They need to wrap software around their hardware so they can get more account control and offset all the price pressure on hardware."
NDS's software makes sure that paid content gets to the right device, whether it's a cable box, smart TV, tablet computer or mobile phone. Cisco also needs more advanced software to generate recurring revenue from subscriptions and to build on its existing networking gear, Chambers said on a conference call yesterday.
Cisco fell 1.4 percent to $19.91 at the close in New York, valuing the company at $107.2 billion and giving it a gain so far this year of 10 percent.
Turnaround Plan
Chambers is looking to add more profitable products as part of a turnaround plan undertaken last year, when he cut jobs and eliminated businesses. The company, trying to reignite growth after market-share losses to rivals, has become more competitive on price.
Last month, Cisco reported fiscal second-quarter earnings and sales that beat estimates, defying concerns that delays in network upgrades by phone and cable companies would drag down revenue.
NDS is Cisco's biggest deal since it bought Scientific- Atlanta Inc. in 2006, according to data compiled by Bloomberg. Based in Middlesex, England, NDS makes software for pay-TV channels used by British Sky Broadcasting Corp. and DirecTV and is co-owned by Rupert Murdoch's News Corp. and London private- equity firm Permira Advisers LLP.
Video Technology
News Corp. and Permira agreed to take NDS private in 2008 in a deal that gave New York-based News Corp. a 49 percent stake and Permira the remaining 51 percent. News Corp. had previously held 72 percent.
As part of the purchase, Cisco will get operations in India, China, Israel, the U.K. and France as well as about 5,000 NDS employees, who will join Cisco's video technology business for service providers. The purchase price, compared to the earnings NDS makes before interest, taxes, depreciation and amortization, is in line with what News Corp. and Permira paid when they took the company private, according to Cisco.
The boards of both companies have approved the transaction, which is subject to regulatory review and will be completed in the second half, Cisco said. JPMorgan Chase & Co. and Centerview Partners LLP advised Cisco on the transaction.
Overseas Earnings
Cisco is using some of its cash parked overseas to pay for the acquisition, which includes debt and retention-based incentives.
The company is part of a U.S. group that has been lobbying for a repatriation tax holiday for offshore profits. When overseas earnings are brought back to the U.S., the money is taxed at the federal and state combined corporate rate of 39.5 percent, minus credits. Chambers has advocated lowering the rate, saying companies that do business internationally are taxed twice, once in the local market and then again when earnings are repatriated to the U.S.
(Cisco hosted a call to discuss the deal yesterday. For a replay, call +1-800-469-5424 in the U.S. and +1-203-369-3287 from elsewhere.)
To contact the reporters on this story: Jordan Robertson in San Francisco at jrobertson40@bloomberg.net; Serena Saitto in New York at ssaitto@bloomberg.net
To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net
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