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Valuing Scientific-Atlanta Acquired by Cisco Systems which has a Beta of 1.31

Valuing Scientific-Atlanta Acquired by Cisco Systems which has a Beta of 1.31 Assume Risk Free Rate of 5% and Equity Premium of 5% Net  $333,674  $155,808   $102,343 Earnings Equates to 52% and 114% growth rates

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Valuing Scientific-Atlanta Acquired by Cisco Systems which has a Beta of 1.31

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  1. Valuing Scientific-Atlanta Acquired by Cisco Systems which has a Beta of 1.31 Assume Risk Free Rate of 5% and Equity Premium of 5% Net  $333,674  $155,808   $102,343 Earnings Equates to 52% and 114% growth rates But there appeared to be an acquisition in 2001 thus not “organic growth.” Let’s use 50% growth rate for 3 years then terminal earnings.

  2. Valuing Scientific-Atlanta Finding Cost of Capital Cost of Capital = RF+(EP*B) 5+(5*1.31)=11.55

  3. Valuing Scientific-Atlanta Year Projected Discount PV Earnings Rate 2002 500,511 11.55 448,687 2003 750,767 11.55 603,345 2004 1,126,151 11.55 811,312 1,863,344 1,126,151 = 9,750,225 6,297,038 .1155 $ 8,160,382 P/E of 24.5 Shares outstanding in 2001 164,899,158 $49.49 per share

  4. Valuing Scientific-Atlanta Alternatives Use unleveraged Beta (but this company has no real debt capital. Use a different measure of earnings like EBITDA for 2001 $577,155 2002 865,733 2003 1,298,600 2004 1,947,900 Yields a value of $11,069,908 Or use an EBITDA multiple (13x 2002 EBITDA, top of the range in the boom of broadband telecom) $11,254,529

  5. Cisco bought it in 2006 for $43 per share or $6.9 billion. There appear to have been a little over 160 million outstanding shares.

  6. Selected Financial Data (Dollars in Thousands, Except per Share Data) 2005     2004       2003       2002       2001   Sales $1,910,892   $ 1,708,004     $ 1,450,353     $ 1,671,117     $ 2,512,016   CostofSales1,195,667     1,073,202       947,581       1,086,961       1,718,160   Sales and Admin   203,118     199,118       191,134       186,579       220,161   R and D    163,543     149,233       146,596       148,652       154,346   Restructuring Expense (291)     1,325       17,446       28,164       —     Earnings before Income Taxes 322,907     308,333       152,098      158,435     510,402   Net Earnings$210,760   $ 218,001     $ 100,345    104,384     $333,674 Thus they paid 37.3 times earnings compared to our P/E of 24.5

  7. Net Earnings 210,760 Depreciation 78,954 Interest Expense (298,222) Taxes 112,147 EBITDA 103,639 (price is about 66x) Cash provided by operating $349,614

  8. But press release says the price net of cash balances is really $5.3 billion which is: • PE of 25 and EBITDA multiple of 51

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