2nd UPDATE: Cisco To Acquire Video-Software Maker NDS Group

Cisco Systems Inc. (CSCO) agreed to acquire video-software maker NDS Group Ltd. for $4 billion, the company's biggest deal in more than two years and a reflection of Cisco's focus on video.

The U.K.-based NDS--partially owned by News Corp. (NWS, NWSA)--provides equipment and services to television providers like cable and satellite companies. Cisco said it was attracted by NDS's technology, its services-based business model that derives more than half of its revenue from recurring sources, and how NDS could help grow the Videoscape product Cisco sells to online media providers.

Under the deal, expected to close in the second half of the year, Cisco also will assume nearly $1 billion of debt, in addition to paying the $4 billion. Cisco, which had been in less formal talks with NDS since last year, entered exclusive talks to buy the company about three weeks ago, a person familiar with the deal said.

Cisco, which sees the acquisition adding to its adjusted earnings in the first full year after completion, doesn't expect to encounter big antitrust hurdles, another person familiar with the matter said.

Cisco shares slid 1.7% to $19.86.

The buyout comes as NDS was on course to go public this year. The company is 51% owned by private-equity firm Permira Advisers LLP, with News Corp. holding the remaining stake. News Corp. also owns Dow Jones & Co., publisher of this newswire and The Wall Street Journal.

News Corp.'s Class A shares rose nearly 1% to $20.21. The deal will help simplify News Corp.'s structure that some investors say contains too many minority stakes in varied companies.

NDS, with more than 5,000 employees, makes software used by cable-television and satellite companies to encrypt signals to deliver TV programming and other video though various devices, including TVs and set-top boxes. Its customers include DirecTV and China Central Television. The company was taken private in 2009 in a deal that valued it at $3.6 billion.

NDS had revenue of $957 million in the fiscal year ended June 30, according to a regulatory filing. It reported income of $252 million.

The tie-up allows Cisco to tap into some of its overseas cash, which Chief Executive John Chambers called an additional benefit. The company had more than $46 billion in cash at the end of January, but only a small amount is in the U.S.

Chambers has been among the most vocal advocates of a tax holiday that would allow U.S. businesses to repatriate cash without having to pay much tax. Absent that, he has said Cisco is likely to spend it overseas.

Historically one of Silicon Valley's most active buyers, Cisco has focused more recently on acquiring start-ups and small companies. Last month, though, Cisco executives said on the company's earnings conference call that they were seeking bigger acquisitions.

Of late, the San Jose, Calif., company has been backtracking from an effort to expand into 30 new businesses, instead narrowing its focus to a few core areas, including video. The deal is a natural extension of Cisco's Scientific-Atlanta set-top business, although Chambers said NDS and Scientific Atlanta products have almost no overlap.

The addition of NDS would accelerate Videoscape's shift in revenue streams from set-top boxes into more profitable service-based models by at least one to two years, Chambers said. Videoscape--which includes a set-top box, software interface and other gear--allows users to watch and search across live, on-demand and recorded TV programming as well as online video.

Evercore Partners analyst Alkesh Shah said NDS's financial profile should benefit Cisco, as both its earnings and revenue growth and gross-margin levels trump the tech giant's. Chambers noted that NDS was in the hot area of technology that allows service providers to bring content to any device and be able to monetize it.

Shah also said NDS is a very interesting play in the emerging markets of Brazil, India and China because of its strong encryption capabilities, which give video providers security and access control for set-top boxes. Encryption is important in those countries, and NDS's growth is concentrated in those areas, Shah said.

Cisco executives, meanwhile, said NDS's strong relationships with satellite providers complement Cisco's own base of telecommunications companies.

Joanna Makris, analyst at Mizuho Securities USA, noted that "right now there's a convergence going on between the television and PC, and what Cisco is trying to do is capitalize on that convergence."

-By Joan E. Solsman and Ben Worthen, Dow Jones Newswires; 212-416-2291; joan.solsman@dowjones.com

--Dana Cimilluca and Anupreeta Das contributed to this report.

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