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.

Related Articles
  1. Stock Analysis

    3 Resilient Oil Stocks for a Down Market

    Stuck on oil? Take a look at these six stocks—three that present risk vs. three that offer some resiliency.
  2. Economics

    Keep an Eye on These Emerging Economies

    Emerging markets have been hammered lately, but these three countries (and their large and young populations) are worth monitoring.
  3. Stock Analysis

    Is Pepsi (PEP) Still a Safe Bet?

    PepsiCo has long been known as one of the most resilient stocks throughout the broader market. Is this still the case today?
  4. Investing

    The ABCs of Bond ETF Distributions

    How do bond exchange traded fund (ETF) distributions work? It’s a question I get a lot. First, let’s explain what we mean by distributions.
  5. Stock Analysis

    3 Stocks that Are Top Bets for Retirement

    These three stocks are resilient, fundamentally sound and also pay generous dividends.
  6. Investing News

    Are Stocks Cheap Now? Nope. And Here's Why

    Are stocks cheap right now? Be wary of those who are telling you what you want to hear. Here's why.
  7. Investing News

    4 Value Stocks Worth Your Immediate Attention

    Here are four stocks that offer good value and will likely outperform the majority of stocks throughout the broader market over the next several years.
  8. Investing News

    These 3 High-Quality Stocks Are Dividend Royalty

    Here are three resilient, dividend-paying companies that may mitigate some worry in an uncertain investing environment.
  9. Stock Analysis

    An Auto Stock Alternative to Ford and GM

    If you're not sure where Ford and General Motors are going, you might want to look at this auto investment option instead.
  10. Mutual Funds & ETFs

    The 4 Best Buy-and-Hold ETFs

    Explore detailed analyses of the top buy-and-hold exchange traded funds, and learn about their characteristics, statistics and suitability.
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    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 >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    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 >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!