Cisco Systems (CSCO.O) made its first major acquisition in over two years with a deal to buy NDS, which develops pay TV software, for $5 billion, aiming to boost its presence in the video communications market.
In its biggest acquisition since it bought Norway's videoconferencing company Tandberg for $3.3 billion in 2009, Cisco said NDS was a strategic fit for its video system Videoscape, as NDS' software allows cable and satellite TV companies to deliver encrypted content through televisions and other devices.
Chief Executive John Chambers said Cisco first began looking at NDS about a year ago because of what customers were saying about the company.
NDS technology is used by BSkyB BSY.L and Sky Italia in Europe as well as customers such as Cablevision Systems Corp (CVC.N), Comcast Corp (CMCSA.O) and Rogers Communications Inc (RCIb.TO) in North America.
NDS, which filed for a public listing in December, is 51 percent owned by private equity fund Permira PERM.UL and 49 percent by News Corp (NWSA.O).
Cisco, whose bread-and-butter business is routers and switches that manage Internet traffic, is keen to find new networking functions. The company is betting heavily on video, which Chambers likes to call "the new voice" and is one of its five growth pillars.
"This is the right deal to do right now," Chambers said on a call with analysts, as the way television programming and video are being consumed is changing. "It (video) will be pervasive, on every device," he said.
He said NDS' flagship product, VideoGuard, which is installed on home TVs via smartcards integrated into set-top boxes, complements Cisco's video offerings because it allows television operators to extend their pay-TV services to other media devices while ensuring that content cannot be hacked by non-paying customers.
Chambers said there were more opportunities for acquisitions, but said any future buys would likely be smaller.
Cisco said it would pay about $5 billion, including the assumption of debt and retention-based incentives, to acquire all of NDS, which Chambers said has less than $1 billion in total liabilities.
Cisco's other recent large acquisitions include online video platform WebEx for $2.9 billion in 2007 and digital cable set-top box unit Scientific Atlanta for $6.9 billion in 2005.
The boards of Cisco and NDS have approved the acquisition, which is expected to close during the second half of 2012.
The purchase price is about 35 percent higher than the value of NDS when it was delisted from Nasdaq in 2009.
"While we view the price as rich for a company growing sales less than 10 percent year on year, we believe it addresses a large opportunity in enabling service providers to offer comprehensive digital media and integrated video offerings," ISI analyst Brian Marshall said in a note.
Cisco said the deal would add to earnings per share in the first year but Marshall said it was not clear how that would happen other than through job cuts.
Chambers said he based his assumption on NDS' double-digit growth and recurring revenue stream.
The NDS acquisition is the largest in Israel after the $4.8 billion purchase of Chromatis by Lucent in 2000.
Deals to acquire or merge Israeli and Israel-related tech companies were valued at $5.1 billion in all of 2011 -- the second-highest amount in a decade -- according to the Israel Venture Capital Research Center.
News Corp acquired NDS in 1992 for $15 million. NDS went public in 1999 but was bought back a decade later by Permira and News Corp and turned into a private company.
Analysts said it made sense for News Corp to sell its stake.
"NDS Group is a non-strategic asset," Bernstein analyst Todd Juenger said, adding that News Corp President and COO Chase Carey has said that the company should either monetize or add to the company's equity stakes.
"As a non-strategic equity investment, it makes sense to sell the equity stake in NDS completely'" Juenger said.
"NDS' customer portfolio will broaden Cisco's presence into new segments of the service provider market," Marthin de Beer, Cisco's senior vice president of video, said in a company blog.
"It will expand Cisco's reach into emerging markets where NDS has a strong footprint with customers such as CCTV in China and Bharti and TataSky in India," he added.
Founded in Israel in 1988 and headquartered in London, NDS maintains a large research and development center in Jerusalem.
Cisco shares were down 1.2 percent at $19.95 in afternoon trading.
(Reporting by Tova Cohen in Tel Aviv and Nicola Leske; and Yinka Adegoke in New York; Editing by Lisa Von Ahn and Mark Porter)