Interview: Janney Montgomery Scott---Fishbein, Joel---Analyst
>> welcome back. cisco systems announced plans to buy scientific-atlanta for $6.9 billion, adding the second largest u.s. maker of set-top boxes for cable television and tapping into the growing market for internet tv. what does this mean for the future growth of the company? joining us to help answer that question is joel fishbein, analyst with janney montgomery scott, joining us from philadelphia this afternoon. hi, joel.
>> hello, lori.
>> well, c.e.o. john chambers called the deal medium sized after saying larger ones rarely work but at $6.9 billion, do you think scientific-atlanta is a mid-sized acquisition?
>> no, frankly, this is a large sized acquisition, a good one, from our perspective, but definitely a large acquisition. it propels them into the consumer video market and helps them with their strategy into the consumer i.p. telephony market .
>> do you believe cisco is paying the right price?
>> i think they paid a fair price. there’s been speculation in the market that scientific-atlanta will be one of those properties that will be acquired so the stock had a decent run and i think cisco paid a fair price. somewhere around 25 times earnings.
>> when do you expect us to see the benefit for cisco of this acquisition in its stock price? shares were down over 2% today.
>> obviously, there’s been -- cisco’s been under pressure here the last couple of months here on, really, i think, a disconnect in the marketplace between what its real growth rate is and what people expect. obviously, this company will never grow as fast as it did in the 1990’s but this is a 12% to 15% grower in our opinion, although they haven’t grown that fast in the last couple of quarters. bookings have grown solidly and we think they can grow from 12% to 15%. scientific-atlanta will help them in the near term with that growth and what this really does is, lori, from our perspective, cisco’s now in a position to own the home in a similar way they own the enterprise and this is a great way for them to own the home gateway where they can provision services for all the providers in the markets so we should see immediate benefits as soon as the deal closes.
>> cisco’s routers and switches business has slowed to less than 8%. to what extent will the scientific-atlanta businesses, both the set-top boxes and equipment for internet tv products, offset that?
>> basically, cisco’s breaking out their business into emerging growth markets and this now becomes one of those emerging growth markets . though emerging growth markets have grown in excess of 20% and what’s been offset, as you said, the router and switch business, 80% of their business has been slowing, we suspect that cisco will continue to add emerging technologies to their portfolio to accelerate the growth. this is one of those strategies so i think 12% to 15% is the right overall growth rate for the company as we move into 2006 and beyond.
>> let me ask you, what is the outlook for this internet tv? how quickly is it catching on?
>> if you think about it, now, it’s really accelerated. if you―certain visionaries had a vision of asynchronous tv and right now you can basically get any programming you want at any time you want and i think the time is now and i think with this acquisition, it’s time to market and scaleability for cisco and this allows them to get in there and offer these services that both the cable providers and service providers are trying to compete with. basically, i live in a neighborhood where, it’s seven years old, they’re ripping up my streets. verizon is ripping up my streets to compete with cable providers and i think with this acquisition, cisco is uniquely positioned to help the cable service routers but also the telephony service providers to be able to deliver some of the advanced technology services.
>> so scientific-atlanta has the deal with s.b.c. with cisco, now, as the parent company, will it help scientific-atlanta gain more customers for this internet phone service and tv products?
>> absolutely. and you mentioned, i’m from philadelphia, and one of cisco’s largest customers and also a customer of scientific-atlanta is comcast based in philadelphia. i had the opportunity to speak to them today and they’re really the true test of whether or not this is a good deal or not and they empfatically said this is a good deal for them because this lets them buy more technology although from fewer vendors and solves a lot of their problems so to answer the question of whether or not it’s good for the end customer, it absolutely is according to one of their biggest customers.
>> i want to ask you about the set-top box business, how will cisco benefit from acquiring that, as well, with scientific-atlanta?
>> here’s where it will be interesting down the road. obviously, you said scientific-atlanta is the number two position in the set-top box, motorola, g.i., is the number one position there. scientific-atlanta has certain functionality in there but remember, a year and a half ago, cisco bought a company called linksys with the strategy of getting into the home via router market and adding voice ports to their routers and when these two technologies converge, i think cisco will be in a unique position of offering voice, video, data and mobility convergence.
>> we’ll leave it there, joel. thanks for joining us. joel fishbein, analyst with janney montgomery scott. still much more ahead on “after the bell.”
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Listen Market briefing --- Lori (medium)
Former Refco Chief Executive --- Allan (slow)
Cisco --- Bob (fast)
GE --- Su (fast)
signaling economic growth and a drop in oil prices to the lowest in five months. the standard & poor’s 500 index was little changed today as a drop in energy stocks offset general electric raising its profit forecast. more on that in a moment. first, the settling numbers -- topping our news, former refco chief executive phillip bennett was arraigned in a new york city courtroom today, accused of playing a major role in refco’s bankruptcy by hiding $430 million in debt. allan dodds frank is on the case and joins us from federal court in manhattan. allan?
>> it did not take long for phillip bennett, the 57-year-old former c.e.o. of refco, to say to the judge, i plead not guilty , your honor. he said it in a clipped british accent, since he’s a citizen of the united kingdom, an important fact as the hearing went on. it lasted about half an hour and most of the discussions, after his plea, was whether the judge would allow him to get rid of the electronic ankle bracelet he’s been wearing for six weeks as part of his bail package. he is out on $5 million bail, $50 million bond guaranteed by his wife, son and daughter. and his two residences, a park avenue apartment and an estate in new jersey. but that only is worth about $20 million, according to the prosecutor, who argued the electronic bracelet should remain, especially since mr. bennett is a citizen of the united kingdom. the prosecutor said that mr. bennett’s daughter has an $18 million jet and the government is concerned that bennett could flee since, according to the prosecutor, he faces what amounts to, under the sentencing guidelines, given the large amount of money in the case and the eight counts he faces, of potential life sentence in prison and therefore he would have every motive to flee. the defense lawyer for phillip bennett argued to the contrary, saying that bennett has lived in this country continuously for 27 years and he would never subject his wife and his son and his daughter to the sanctions of the court that would result if he fled the country. however, the prosecutor is concerned that bennett could take his whole family and leave so the judge said he wanted to think about this. in the meantime, they had a hearing set for january 18 where they will discuss the evidence in a regular pretrial hearing.
>> thank you very much. another refco note, a judge has halted customer account lawsuits until december 8. these are lawsuits by customers seeking to recover $1.8 billion in accounts. refco claims the accounts are debt, not customer property, meaning customers might not get all of their money back. customers argue the money is theirs and was only being held by refco. cisco agrees to buy scientific-atlanta, the maker of cable tv set-top boxes for a price tag of $6.9 billion. bob bowden has all the details.
>> cisco systems equipment directs 2/3 of all the data on the internet and scientific-atlanta is the second biggest maker of cable boxes with customers that include the biggest of cable tv companies like time warner cable, comcast and cablevision. cisco agreed to pay $6.9 billion for scientific-atlanta, which works out to $43 a share. while it’s just a 3.7% premium over thursday’s closing price of $41.45, scientific-atlanta stock has been rallying the last month as investors have been anticipating an acquisition. look at the right side of this six-months chart and you see that one-month rally. if you look at the last 30 days in particular, a 23% gain for scientific-atlanta shares. this stock has fallen only twice in the last 17 sessions. by buying scientific-atlanta, cisco chief executive officer is targeting consumers’ growing use of television and cable modems with softness in business spending on routers. revenues grew 9.7% last quarter and earlier this month the company forecast 8% to 9% growth for the current quarter. chambers described the synergies of a combined company.
>> if you look at the market you’ll see a convergence of data, voice, mobility. cisco is a clear leader in data, voice and mobility and scientific-atlanta is a leader in video and so by putting them together, you’re going where the market is going to be in the future.
>> investors perhaps a bit skeptical, cisco shares down 2%, not unusual for the acquirer shares to fall after such an announcement. the cisco, the seventh worst nasdaq 100 stock today. you see the stock has been down over 11%, 11.5% in six months.
>> thanks so much for that. the other major deal of the day involves general electric, selling its reinsurance unit. g.e. shares rose 3% after the company agreed to sell its reinsurance business to swiss reinsurance company for $6.8 billion in cash and stock. also, g.e. boosted its profit forecast. su keenan is here with more on the story.
>> general electric’s sale of its insurance business for close to $7 billion marks the next phase in c.e.o. jeff immelt’s plan to reinvigorate growth by focusing on the fastest growing areas. the company is not getting rid of all financial services. g.e. still has its profitable consumer finance division, g.e. credit. according to merger insight’s tom burnett, the move is designed to diversify g.e. away from the cyclicality of the insurance industry and is consistent with the company’s focus on manufacturing and industrial businesses of the burnett says the market likes the price and the deal. for swiss re, the purchase of g.e. insurance solutions, it’s the company’s biggest acquisition yet. swiss re will assume $1.7 billion of debt and plans to sell as much as $7.5 billion of securities in order to fund the purchase. shares of the company rose as much as 3% in zurich and the incoming c.e.o. says the purchase should contribute to earnings growth by 2007.
>> at least $300 million of synergies will accrue to our shareholders by 2008 and thus will be implemented during the first 18 months after the acquisition closes.
>> g.e.’s immelt released a statement saying the sale allows his company to enter next year with the fastest growing, high return set of businesses in years. the company boosted its profit forecast as much as 17%, increased the stock buyback plan by 25 billion through 2008 and raised its quarterly dividend by almost 14%.
>> thank you very much for that. moving on, as “after the bell” continues, crude oil closed little changed today. at the close, it was below $57 a barrel, falling to a five-month low on speculation fuel stockpiles are adequate to meet global demand. for the week, crude oil down $1.39 to close at $56.14 a barrel. heating oil and gasoline futures fell for the seventh straight week and gold fell from its highest point in almost 18 years. speculation some traders sold bullion for profit after prices rallied 6.2% in the past two weeks. gold climbed 3.6% this week, the most since august 2004, as investors sought alternatives to u.s. and european currencies, stocks and bonds. delphi c.e.o. steve miller said all of the company’s u.s. plants will have to close unless unions agree to wage cuts to help the largest u.s. auto parts maker exit bankruptcy. he said he’s not received a union counter offer on his proposal to cut worker wages to as low as $12.50 an hour. in an interview earlier today on bloomberg television, miller said delphi needs to cut wages in order to be competitive. miller took delphi into bankruptcy back on october 8. he offered a second proposal to the company’s unions this week, seeking to cut the u.s. hourly work force to about 10,000, while reducing wages. united auto workers president, ron gettelfinger, called the offer an insult and said the union has a right to strike if miller is given permission by a bankruptcy court to nullify labor contracts.
>> we are certainly willing to discuss the individual elements as between the wage package, the structure of the benefit package and so on. but the one thing we can’t do is collect more money from our customers than what our competitors are charging them for comparable work done in the u.s. by the unionized work forces.
>> and miller has said that he will ask the bankruptcy court to let delphi impose terms if unions don’t agree to pay and benefit reductions by december 16. “after the bell” continues with more on the big deals of the day as cisco acquires scientific-atlanta.
