S-A’s McDonald: Cisco Was Best Match

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Scientific-Atlanta Inc. CEO Jim McDonald and Cisco Systems Inc. vice president of corporate business development Ned Cooper spoke with Multichannel News technology editor Matt Stump Friday, the day Cisco announced its $6.9 billion deal to acquire S-A. An edited transcript follows:

MCN: Can you tell us the evolution of how this deal came about? We heard Samsung Electronics America Inc. and others were in the running. We’re you negotiating simultaneously, or did you have an exclusive negotiating period with Cisco over the last month or so?

McDonald: It starts with a lot of strategic planning, a lot of reviews with our board, things we present and outside people we bring in to present. We focused on: Where is the industry going long-term? How is all of this stuff going to evolve?

The first phase is about bundled services and, now, bringing wireless in so you have the quad play. This thing will move to a set of sequences, which are on-demand, integrated applications, personal applications, and what that means is that you need to bring all of this stuff together.

We had a lot of strength with video and systems integration. There are a lot of things in the voice and data space that we didn’t bring to the table.

When you start to look at the customer’s needs, there were things we had to fill out in this thing to do it. You’ve got three approaches to it. You can try to staff up and do it and in voice and data, and that would be a Herculean thing for someone like us to do. You can partner, but, in many cases, you have to be a little bit nervous about value leaking out of the partnership over time, and will you really retain your uniqueness?

In our case, we have $1.5 billion in cash, and the question is: Should we be an acquirer or should we be acquired? As we looked around at the options, it became obvious that the best match in this thing was Cisco. We’ve known the executives for a long period of time. As we got more engaged, it became obvious that this was a match.

We did talk to some other people in the process to understand what their interests were. As we concluded that this was the right partnership, then it became: How do you get the right price for your shareholders?

MCN: How much did opportunities in the telco market drive this deal?

McDonald: The worldwide opportunity is the largest over time. We’re doing a little bit over 20% of our sales internationally. Cisco has a little over one-half of their sales internationally. We don’t have any telephone relationships internationally, even though we have the technology. Our ability to take this on a worldwide basis was quite limited, to staff to sell into the telephony community. International is a very large opportunity for us.

We had our best quarter ever internationally last quarter. So the opportunity is out there. But we need to leverage it quickly, and this provides a lot of incremental opportunity.

Cooper: IP telco video and the network digital homes are in the early stages of market transition. And we see significant growth opportunities in those businesses on a global basis going forward. By combining S-A’s video capability with Cisco IP [Internet-protocol] technology and our data, voice and mobility capability, as well as our global channels and our Linksys product, we think we can provide an offering into the market that is unmatched.

MCN: What about cable’s play with Sprint Nextel Corp. and what you could sell into that partnership?

Cooper: Our Linksys product offers Wi-Fi-access points. When you think about what cable and wireless guys are trying to do -- things like applications with dual-mode 802.11 in a cellular phone, so when you come into the home, you roam onto the home wireless network -- we provide the home Wi-Fi access point.

We have partnerships with companies like Motorola [Inc.] and Nokia [Corp.] to build dual-mode phones. We’re also the worldwide leader in selling IP backbone and data-applications infrastructure into mobile-wireless-service providers. We can provide an end-to-end capability for roaming between the wireless and wireline network.

MCN: Can you talk a little about Time Warner Cable’s and Comcast Corp.’s reactions? Time Warner might have a concern about you being swallowed up by a big company and not being as responsive as in the past.

McDonald: We have confidential relationships, so I did call our customers last night after our board approved this. I talked to [Time Warner Cable chairman and CEO] Glenn Britt last night, and he was very positive. Today, [Cisco CEO] John Chambers and I called Glenn and talked to him together about it. He is a large customer of Cisco, and we’re the largest supplier for all of Time Warner. We both have very good relations.

Our customers are moving toward these integrated solutions and, as a result, they viewed it as positive. I talked to [chief operating officer] Tom Rutledge of Cablevision [Systems Corp.] last night, and he was quite positive about it.

MCN: There’s a lot of discussion about moving to an all-IP platform. How soon do you see that happening with your cable customers?

Cooper: In the end, it’s about the consumer and providing services to the consumer. We both see the opportunity to provide integrated voice, video, data and mobility services into the consumer as the opportunity that is the best one for service providers to increase their RPUs [revenue per unit] by adding more services on top of the existing networks.

And IP is far and away the best technology to deploy integrated services on the network. The timing of the evolution depends on many factors, but there is no question that the applications on the network will converge on IP. We can help the service providers speed that transition by bringing together the combined expertises.

McDonald: You have to start where you are and figure out how to go from there. If you’re someone like SBC [Communications Inc.], you’re going to build an all-IP network to start with -- basically, have a green-field approach. You already have voice and data services out there, so it’s only natural that you would do IP video.

If you look at the cable operator, they have three different services that are frequency-separated on the same network. So while the video comes down MPEG, you have IP voice and services that are IP-formatted.

Most of the device world in consumer electronics is all IP-based. Everybody is on transition path. If you have a whole lot of MPEG set-tops in there, you are going to be a lot slower-moving in that direction. You can still get to the services. We can do switched digital video in that domain and give you the segmented services. Everybody is moving in that direction. But everybody will have a little different strategy.

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