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Scientific-Atlanta: Cisco's Sweet Deal?

Posted by iNext - 2005-11-30

Investor grumbling about Cisco Systems Inc.'s acquisition of Scientific-Atlanta Inc. appears to be gathering momentum. This vocal opposition says bidders may have been ready to pay more for the set-top box company.

Wall Street analysts and sources close to the cable equipment and set-top box maker say that Scientific-Atlanta had other offers on the table -- some of which were higher -- but were drawn to Cisco's cash stash, rather than accepting a higher bid that may have combined cash and stock.

Who else might have been in the running? Sources familiar with the situation say Samsung Corp. was in deep discussions to buy SFA and Alcatel even expressed interest in the early goings. They say Alcatel, in particular, would be loathe to see Scientific-Atlanta, a key partner in the French vendor's deployment at SBC Communications Inc. , fall into Cisco's hands.

Scientific-Atlanta (SFA) CEO Jim McDonald said last week that Cisco is, and was, the only viable offer. During a CNBC interview on November 18, when asked if SFA spoke to any companies other than Cisco about buying it, McDonald left the impression that it was Cisco's deal all along. "We had a few conversations with a few people that we thought might be very close to us, but in general we didn't go across the board with anything," the CEO said during the interview.

Despite McDonald's assurances, some shareholders at SFA feel that other bidders were prepared to do better than the $43 per share in cash from Cisco -- by throwing in more value in stock. Last week, Scientific-Atlanta was sued twice by shareholders alleging it had breached its fiduciary duty to shareholders.

SFA says that it got the best price it could at the time. "The board of directors of Scientific-Atlanta engaged in a thorough and deliberative process to obtain the best transaction at the highest price available for its shareholders, culminating in the definitive merger agreement with Cisco, which was announced on November 18," the company said in a statement.

Alcatel says only that it doesn't discuss details regarding its merger and acquisition strategy, and that it wouldn't comment on speculation citing specific companies. Samsung could not be reached for comment.

Several other companies have made the rounds in rumors as possible suitors with an interest in SFA. These include Apple Computer Inc., Matsushita Electric Industrial Co. Ltd., and Sony Corp.

The verdict on Wall Street is that the Cisco acquisition of SFA will go through, but SFA could have fetched a higher price if only it was willing to take cash and stock instead of Cisco's lower, all-cash bid.

"The message to the shareholders was, 'Do you want foreign stock or Cisco's cash?'" said one financial analyst who spoke on the condition of anonymity.

In a research note issued last week, Ehud A. Gelblum and the analysts at J.P. Morgan Chase & Co. wrote that the $43 price for SFA is "way too low." But the analysts write that Cisco's willingness to pay all cash and its willingness to leave Scientific-Atlanta's management, staff and headquarters in Atlanta comprised "a promise that we believe it may have been difficult for other potential suitors to have made."

Gelblum writes that the deal SFA accepted was below the $49.45 to $51.60 per share, or $7.9 billion to $8.3 billion in total, that the company is actually worth.

"We strongly believe that at $43, other companies such as Alcatel, Sony, Samsung, and Panasonic could very well be tempted to take a second look... and potentially would be enticed into making a competing -- and perhaps hostile -- bid," Gelblum writes.

In a research note issued today, Needham analyst Anton Wahlman adds his voice to the chorus that says SFA could have held out for more money. "We believe there were competing bids for SFA, including probably Samsung, Alcatel and Sony," Wahlman writes. "We believe that perhaps all such competing bids may have been for higher prices, albeit in whole or in part in stock as opposed to 100% cash. We believe this could explain why there were so many busloads of advisors, fairness opinions and lawyers involved in helping SFA shareholders explain its choice to accept what could turn out to be at least nominally the lowest bid."

Cisco says it won't comment on whether there were other bidders. And a company spokeswoman tells Light Reading there's nothing unusual about why it chose to make a cash and debt offer -- instead of a cash and stock offer -- when it agreed to acquire SFA. "Recently, if you look at the acquisitions we've done in the past several years we've tended to use cash," says Cisco spokeswoman Elizabeth McNichols.

Meanwhile, the rumblings that there were multiple discussions about and perhaps multiple bids for Scientific-Atlanta come as deployment and M&A activity in the IPTV sector heats up. And as the stakes for capturing big carrier convergence deals gets higher and higher, the consolidation will only continue.



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