Cisco surprises everyone with Scientific-Atlanta Acquisition

So Cisco acquires this "set-top box" company:

http://newsroom.cisco.com/dlls/2005/corp_111805.html

[ which, btw, builds end-to-end video distribution systems and provides video system integration ]

Elements of Surprise:
When I read the news this morning, I was surprised with this acquisition for the reasons mentioned below. As anyone expected, stock market punished us with CSCO below $17 after a year now? Anyway, this was a surprise move because:

• Its *huge* size - 7600 employees: We dont do these large acquisitions (well except Crescendo or Stratacom)? What happens to our revenues per employee? What happens to our cost structure which we just got to 35%? How does it affect Cisco's hiring process - we were very selective till very late?
• Amount of money for the acquisition - $6.9B: Are we back in 1999/2000 days?
• Buyout in Cash: This is just so against what John talks about. New employees need to show the same commitment as other Cisco employees? In the era of knowledge workers, Management team need to stay?
• It is being referred to the "set-top box" company: Why don't we put this company under Linksys brand? Why under Cisco brand?
• It is based off Atlanta and not off Silicon Valley: We have less than 15% acquisitions that are non Silicon valley based

When I did more research, more surprise elements sprung:

• Company's gross margins are ~35% and Net Income is 11%: With the size of the company (unlike Linksys), it would affect our gross margins for a long time?
• Company's revenues are $1.9B: Bit of relief that this would grow our topline immediately accompanied with the worry about our bottomline?

These thoughts were all over the place:

• Did John himself (by now you know, I think very highly of him) succumb to pressure from Wall Street to show growth?
• What happened to the basics of profits and productivity? Productivity that would help us beat our Asian competitors?

There seems to be a link missing here. Probably John is doing something which most people can not see. And John wants to keep that secret with him for now. I hope this is true.

With more thinking, may be we are taking the news at its face value under-estimating its value. Lets explore that and see a different viewpoint

Visionary Shoes:

So lets look at this from a different viewpoint:

• John reminded us of the large Crescendo acquisition that got this router company into switching market, another large acquisition Stratacom that got us into the Service Provider space, Linksys (albeit small) got us into commercial. Similarly this large acquisition Scientific-Atlanta will get us into the Video for the service-provider
• You remember we added "Communications" on our badges for FY-06. Lets see - we are leaders in data communications, we became leaders in Enterprise Voice (including Legacy and IP) this quarter, we are leaders in VoIP segment in service-provider segment. hmm.. so guess what? The important corner-stone missing to make us a true communications company is Video
• To add to the Communications piece discussed above: with the focus on solutions for triple and quadruple play for service-providers, we needed a Video solution and a known brand behind it. Thats what this company gives us [ Just to remind that we may also share some of the credible features across with our very successful Enterprise Content Delivery Networks (ACNS) ]
• This acquisition was the topic of discussion during our team lunch. The question that came up was: are we entering digital home equipment market competing with the likes of Sony, Phillips and Samsung? I said - no way, that's a cut-throat competitive market. So how do we position ourselves? And it flashed - anything that is an end-point like your digital TV, iPod, XBOX etc - that's not our business. Anything that moves traffic - that's networking - that's Cisco's domain. So this position fits in. And we still would partner with all the digital home equipment vendors
• The above also opened up what we were doing with Linksys in the commercial market: Linksys is already the home networking leader for wired or wireless access, we have added VoIP with Sipura and true home interactions with Kiss. So with this complements the Linksys solution pretty well
• Lets look at the financial aspect:
• this is a monopolistic market: Motorola with the acquisition of X as another player. This enables the players to add more value for customers and in turn increase their gross margins. This also provides better bargaining power from suppliers and buyers.. i.e. unless one player is more focused on market share driving the margins out of the business
• I am sure John would ask this new unit to control the costs and increase the gross margins and profits
• As expected, This would be a separate entity within Cisco. Like many others in Cisco, I don't believe in doing large acquisitions for the sake of synergies across activities - that never works

Lastly as John says "If mostly everyone agrees to your strategy, you are already too late"

Conclusion:

So what is my opinion? I think if we execute it well, we can make this our fastest growing advanced technology