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Cisco Systems (CSCO - Analyst Report) announced that it was buying London-based video communications company NDS for $4 billion, net of a billion dollars NDS has in debt. Although expensive, NDS could enable Cisco to address opportunities in what is a fast-growing segment, so it could be a safe bet. Cisco will be using its offshore cash balances to make the purchase.

Private equity fund Permira currently owns 51% of NDS and the balance belongs to News Corp (NWS - Snapshot Report). Following the acquisition, NDS will become a part of the Cisco Service Provider Video Technology Group and be headed by SVP and General Manager Jesper Andersen. Dr. Abe Peled from NDS will become the SVP and Chief Strategist of Cisco’s Video and Collaboration Group, directly reporting to Marthin De Beer, SVP of Cisco’s Video and Collaboration Group.

The boards of both companies have approved the deal, which should close in the second half of the year.

Cisco already has offerings in video communications. Its Videoscape solution, which is the platform for its video offerings is being developed and enhanced every day. Videoscape basically connects the cloud with customers through the network. Since NDS’ core competency is the delivery and protection of digital content, it has the potential to dramatically increase the usage of Cisco’s platform.

Thus far, NDS has been focused on consumer entertainment. Its primary product (that made the acquisition worthwhile for Cisco) is its VideoGuard solution, which is installed on televisions through special set top boxes (STBs) that incorporate the relevant smartcard. The solution enables service providers to extend pay-TV services securely to multi-media devices other than TVs.

Cisco on the other hand has been more focused on enterprise video conferencing. However, in CEO John Chambers’ own words, “We are on the cusp of a whole new wave of digital entertainment experiences that will make video content much easier to find, navigate, interact with and enjoy, on any device and network”.Therefore, extension of video conferencing to any environment and any device remains an organizational focal point and the acquisition furthers this objective.

The company is seeing slower growth rates in its core networking business, not only because of its own product overhaul and caution at customers, but also because of increasing competition from companies like Juniper Networks (JNPR - Analyst Report) and F5 Networks (FFIV - Snapshot Report) that are managing to create their own niches. The slowing growth rates in the core business could be well complemented with increases in other high-growth areas.

Another point to consider is the long-term impact of a strong video-conferencing business. The growing software and services business would generate higher margins for Cisco and also open up opportunities for selling its core networking products, since the network is the basic infrastructure that will support the process.

Cisco has spent a packet to acquire companies with relevant technology in the space. In 2009, it picked up Tandberg for $3.3 billion. This was preceded by online video platform WebEx for $2.9 billion in 2007 and cable STB company, Scientific Atlanta for $6.9 billion in 2005. However, NDS is the biggest one so far.

It has also gone to great lengths to prevent the EU’s approval of Microsoft Corp’s (MSFT - Analyst Report) Skype acquisition, since it did not provide for adequate caveats to ensure network interoperability.

The Zacks Rank on Cisco shares is #2, implying a Buy recommendation over the next 1-3 months.

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