In just the past few quarters, it really looked as though Cisco (Nasdaq:CSCO) had made some significant strides in turning around both its business and the Wall Street perception of the business. Growth was looking alright again and the company was making progress on margins. Although management had started to talk about its willingness to do deals again, most investors and analysts seemed to think that meant smaller tuck-in deals. (For more, see Earning Forecasts: A Primer.)
Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.
So much for that idea.
On the morning of March 15, Cisco announced that it had agreed to acquire privately-held NDS for $5 billion in cash. NDS is a company that focuses on "end to end" software packages for the cable and satellite TV industry. In particular, NDS is strong in areas like content streaming and security, where its software allows TV content to be delivered to a variety of devices, while preventing unauthorized access (hacking and theft).
Getting Much Bigger in TV/Video
Cisco's interest in the pay TV business is hardly new; the company paid nearly $7 billion for Scientific Atlanta almost seven years ago. "Service Provider Video" is the fourth-largest reported segment at Cisco, with over $1 billion in revenue in the January quarter. Although Cisco has gotten a lot of criticism for the SFA deal, the overall segment saw 23% growth this past quarter, with the cable business also up about 23%.
With this deal, Cisco's revenue from TV/video will grow about 25%. Growth at NDS has been a little erratic, but the profit margins have been healthy. Assuming the normal synergies that go with combining operations, this should be a reasonably accretive deal.
NDS gets a substantial portion of its business (about one-third) from BSkyB and DIRECTV (Nasdaq:DTV), but also counts the majority of the largest pay TV providers in North America and Western Europe among its customer base. Moreover, the company bragged in its own F-1 (it was in the early stages of preparing to go public in 2012) of never losing a major customer to a competitor.
Competitors May Be Breathing a Little Easier
It doesn't seem too far-fetched to think that at least a few competitors are breathing a little easier today. The last thing that companies like F5 (Nasdaq:FFIV), Riverbed (Nasdaq:RVBD) or Fortinet (Nasdaq:FTNT) needed was a more focused Cisco addressing their respective markets. Not only is this deal very much external to their operations, but it also raises the possibility of additional management distraction and internal turbulence; white noise that may further shield them from renewed competitive attention by Cisco.
A Big Bet on the New Tube
Cisco is making it pretty clear that they see meaningful ongoing growth in the market for the software that facilitates TV and video media distribution. Given the growing demand for content streamed to mobile devices like laptops, smartphones and tablets, that doesn't seem like such an unreasonable bet to make.
The back-office needs of cable and satellite TV companies don't get a lot of attention or press, but companies like Microsoft (Nasdaq:MSFT), Google (Nasdaq:GOOG) and Apple (Nasdaq:AAPL) have all been investing in software focused on content delivery and navigation, and both Microsoft and Apple seem at least somewhat interested in middleware and security technologies as well.
The Bottom Line
Cisco is not exactly getting NDS and its technology for a song, as the purchase price and assumed debt appear to total $6 billion, or a little more than six times trailing revenue. Given the recent growth trajectory at NDS, that may be a somewhat steep premium. Still, I wouldn't underestimate the incremental margin opportunities, or the potential sales advantages of a more robust end-to-end product and services portfolio.
Wall Street has long seemed to have its doubts about Cisco's ventures in video, so this deal may not receive a lot of applause at first. While I don't think it dramatically improves Cisco's prospects, it doesn't really hurt them either, and the stock remains a relatively underpriced tech turnaround story. (For additional reading, check out 5 Must-Have Metrics For Value Investors.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.
Stock AnalysisHere are five stocks that pay safe dividends and should be at least somewhat resilient to a bear market.
InvestingThe further you fall, the harder it is to climb back up. It’s a universal truth that is painfully apparent in the investing world.
Fundamental AnalysisOptions market trading data can provide important insights about the direction of stocks and the overall market. Here’s how to track it.
Stock AnalysisCan these two oil stocks buck the trend?
Investing NewsAlcoa plans to split into two companies. Is this a bullish catalyst for investors?
Stock AnalysisIf you want to buck the bear market trend by going long on consumer stocks, these three might be your best bets.
Investing NewsA rate hike would certainly alter the investment scene, but would it be for the better or worse?
Investing NewsWith market volatility high, you may think it is time to run for corporate bonds instead of stocks. Before you do take a deeper look into which is better.
Mutual Funds & ETFsInstead of selling your stocks to get gains, consider a short selling strategy, specifically one that uses short ETFs that help manage the risk.
Investing BasicsDiversifying with international stocks can benefit most portfolios, but beware of country risk.
When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>