Cisco Set to Enter Cable Field

Cisco Systems Inc., the Internet equipment provider, plans to announce today
the acquisition of Scientific-Atlanta, a maker of television set-top boxes,
for $7 billion, according to people who have been briefed on the

These people said the deal, one of the largest acquisitions ever for Cisco,
was approved by the boards of both companies after the close of the stock
market yesterday.

The final price is expected to be around $5.3 billion because Cisco expects
to acquire a cash balance of approximately $1.7 billion from

In the last month, Scientific-Atlanta's stock has surged 26 percent on
speculation that the company would be bought. Those gains have pushed the
company's market capitalization to $6.4 billion.

Scientific-Atlanta's stock rose $1.15, or 2.9 percent, to $41.45 yesterday.
Cisco's shares rose 15 cents, to $17.37.

Sara Stutzenstein, a Scientific-Atlanta spokeswoman, said she was unable to
comment on speculation about a deal. Terry Anderson, a spokeswoman for
Cisco, also declined to comment.

The news highlights a desire by equipment makers to take advantage of the
growing convergence of Internet technology, telecommunications and

With the deal, Cisco will, for the first time, be able to sell digital
television equipment that provides high-definition programming; shows and
movies on demand; and an array of interactive services. Scientific-Atlanta,
the second-largest provider of these set-top boxes, and Motorola, the
largest, have effectively held a duopoly in this market.

Both Scientific-Atlanta and Motorola have long supplied set-top boxes to
cable operators like Comcast and Time Warner Cable. The boxes, though long
viewed as stodgy decoders of encrypted television signals, have become far
more sophisticated in recent years.

Scientific-Atlanta and Motorola now produce boxes that receive
high-definition programs and include digital video recorders; soon they will
include DVD recorders as well.

Cisco is envisioning a future that includes home entertainment systems built
around a set-top box that communicates with not only the television, but
also with audio equipment and a range of appliances. Cisco also sees
potential growth in services that store television programming on giant
servers for delivery to consumers on demand.

Scientific-Atlanta is also likely to benefit from a requirement that
broadcasters return their analog spectrum to the government in 2009. By
then, hundreds of millions of American televisions will need the equipment
to receive digital signals.

"One of the nice things about set-top boxes is that they are constantly
being overhauled," said Bruce Leichtman, president of the Leichtman Research
Group, which tracks the telecommunications and cable industries. "The cycle
never ends."

A purchase of Scientific-Atlanta would be a coming-out party of sorts for
Cisco as a more consumer-oriented company. The company has been best known
for equipment that routes data around the Internet. These so-called routers
have turned Cisco, with $24 billion in annual sales, into a bellwether

Cisco made its biggest push into the retail market so far in 2003, when it
acquired Linksys, a big maker of Internet routers for the home, for $500

Still, any deal carries considerable risk for Cisco shareholders. The
question of how digital equipment will merge with digital entertainment
remains up in the air. As a result, there is no assurance that
Scientific-Atlanta can retain its dominant position in the set-top box

Scientific-Atlanta, based in Lawrenceville, Ga., has 6,500 employees and
$1.9 billion in annual revenue. Almost all its profit comes from sales of
set-top boxes and related equipment. Cisco, which is based in San Jose,
Calif., has 34,000 employees.

The deal ends a great deal of speculation about Scientific-Atlanta's future.
The company's president, James F. McDonald, is said to be nearing
retirement, and the company, which has ample cash, has largely avoided any

People briefed on the negotiations said Scientific-Atlanta would retain its
current management.

Private Capital Management, run by Bruce S. Sherman, is Scientific-Atlanta's
largest shareholder, with 18.2 million shares, or an 11.8 percent stake.

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