M&A Alert - November 2, 2009
Cisco Agrees to Acquire DVN’s Set Top Box Business
Transaction Overview
On November 2, 2009, Cisco (NASDAQ: CSCO) agreed to acquire DVN’s (SEHK: 0500) set top box business for up to $44.5mm.
Target Description
DVN’s set top box business designs and develops one-way digital converters, HD set top boxes and digital broadcasting systems, enabling transmissions over cable, PSTN, LAN, and satellite networks in Mainland China and Hong Kong. Competitors include Skyworth, Changhong and Huawei Technologies. DVN’s serves 10.5% of Chinese cable market ranking it the 3rd in place after Skyworth and ChangHong. DVN is based in Wanchai, Hong Kong.
Buyer Description
Cisco is the dominant supplier of networking equipment and network management for IP-based networks. It offers routers and storage systems that allow delivery of mobile, data, voice, and video applications on fixed and mobile networks via digital set-top boxes, digital media products and wireless systems. It also offers switching systems that provide connectivity to end users via multiple workstations, IP phones, access points, and servers. The acquired business will be integrated into Cisco’s International Cable Business unit. Ken Klaer, VP/GM of International Cable Business Unit, and Hilton Romanski, VP of Corporate Development were key executive sponsors of the acquisition. Founded in 1984, Cisco is based in San Jose.
Transaction Parameters
The up to $44.5mm purchase price is comprised of a) $27mm in upfront cash payment and b) $17.5mm earnout that is contingent upon sales milestones over the next four years.
 |
|
| Minimum Value of Consideration: | $27mm |
| Maximum Value of Consideration: | $45mm |
| Enterprise Value/Revenue Multiple: | |
| Minimum Value1 |
2.3x |
| Maximum Value1 |
3.7x |
|
1) Based on net income of $12mm as of 11/02/09. Source: CapitalIQ
Strategic Rationale
DVN’s set top box business will enable Cisco to bolster its cable business offerings in China, which stands as the largest cable market in the world with 160mm subscribers as of November 2009. China represents an important long-term opportunity for Cisco with only about one-third of the market having converted to digital cable and the Chinese government mandating full digitization by 2015. In addition, Cisco will also be able to offer next-generation end-to-end cable systems offerings by integrating DVN’s access products with its transmission and core IP-based network products.
Architect Partners’ Observations
We’re beginning to see strategic M&A highlighting the opportunity in China. This transaction highlights Cisco’s commitment to China and video as a long term strategic opportunity, aligned with its previous acquisitions of Tandberg (a video conferencing equipment vendor) and Starent Networks (a 4G wireless equipment maker) that were announced last month in October 2009. DVN will strengthen Cisco’s position in the global (particularly in China) set-top box market place, which had been initiated through its acquisition of U.S. set-top-box maker, Scientific Atlanta in 2005. DVN will also bolster Cisco’s competitiveness against Motorola (or whomever acquires Motorola’s home/networks business which is currently up for sale) which acquired Chinese set-top-box vendor Dahua Digital in 2008 (transaction value was not disclosed). In addition to the DVN’s set top box business acquisition, Cisco also has struck a go-to-market alliance with the remaining DVN’s business to use DVN’s software, applications and support services, enabling Cisco to offer comprehensive cable systems and networking products. All around, this appears to be a smart strategic move for Cisco in the context of its China strategy.