Cisco buys home networker Linksys

Cisco Systems Inc. Thursday announced a definitive agreement to acquire privately held Linksys Group Inc., a leading provider of wired and wireless network products for consumers and small office/home office users, for US$500 million in stock.

The acquisition represents Cisco's entry into the high-growth consumer/SOHO market, which is expected to grow from $3.7 billion in 2002 to $7.5 billion in 2006 worldwide, the company says, citing data from Dell'Oro Group and Synergy Research. Home networks allow consumers to share broadband Internet connections, files, printers, digital music, photos, and gaming over a wired or wireless LAN.

Under the terms of the agreement, Cisco will issue common stock with an aggregate value of approximately $500 million to acquire Linksys and to assume all outstanding employee stock options. The acquisition of Linksys is expected to close in the fourth quarter of Cisco's fiscal year 2003.

"This acquisition is a solid example of Cisco's strategy to broaden its end-to-end portfolio of network solutions into high-growth markets such as wireless, voice-over-IP and storage-area networking," Cisco President and CEO John Chambers said in a statement.

Linksys has more than 70 products, including wireless routers and access points for simultaneous sharing of broadband Internet connections, and wireless network adapters and wireless print servers. It also offers traditional wired products, such as Ethernet routers and cable modems, unmanaged switches and hubs, print servers and network attached storage for sharing of digital music, photo and video media files.

Linksys owns 45 percent of the market defined as 100 seats and lower and home networking. There is no overlap with Cisco, even when you're talking low end switches, Cisco's are managed and Linksys's are unmanaged, according to Linksys President and CEO Victor Tsao.

Linksys' business will be operated as a division of Cisco, and its products will continue to be sold under the Linksys brand through its existing retail, distributor and e-commerce channels. In addition, Linksys will have access to Cisco's sales infrastructure to address international markets and the service provider channel.

The Linksys Group was founded in 1988 and has 308 employees. The Linksys business, led by Tsao, will report to Cisco senior vice president and general manager, product development Charlie Giancarlo.

The acquisition has been approved by the board of directors of each company and is subject to various closing conditions.

In other news, Cisco brought more clarity to its VoIP product line - literally - this week with the acquisition of SignalWorks, a maker of software for improving the sound quality of IP phone conversations. For the full story click here.

Even though Cisco characterizes the acquisition as its entry into the home and consumer networking market, it is actually a re-entry. Cisco attempted to enter the market through internal development a few times, dating back to the ill-fated CiscoPro effort in 1995, which was tailored to the home professional, among other targets.

Since then, Cisco formed and then disbanded a consumer line of business internally; demonstrated its products in "Internet home" applications and at the annual Consumer Electronics Show; and has and continues to develop and offer a broad line of SOHO routers.

"What we learned through that entire process was that is what not a question of products, but one of business model," says Giancarlo, who used to direct Cisco's consumer line of business. "We had developed great products for these markets -- a number of firsts for the home market -- but these things could not be sustained in Cisco's traditional business model. The high R&D, high support cost, high sales cost, which works great in an enterprise and service provider environment, is not the right one for a consumer model. What we believe is that this new business model will allow us to compete very successfully in that market."

Added Dan Scheinman, Cisco senior vice president of corporate development: "We also believe broadband is at an inflection point. This is a time in the (home/consumer) market where it is really starting to move towards mass-market. This gives us a unique opportunity to enter the market at this point in time that may not have existed previously. Linksys has managed to pull off the magic of having both innovative product, leading brand, leading customer support, as well as maintaining a very lean operating expense model. Those things combined allow for Cisco to enter this new market in a way that it will make sense for the rest of the business."

Profits margins in the price-sensitive home/consumer network market are around 30 percent, Giancarlo says, while Cisco's are at 70 percent. Cisco hopes to earn "higher-than-industry-average margins" in home/consumer networks through the Linksys acquisition, Giancarlo says.

Cisco will also go up against new, and more directly against some current, low-end competitors, such as Netgear Inc. and D-Link Systems Inc. According to NPD Techworld, Linksys owns 40 percent of the retail networking market, trailed by Netgear with 12 percent and D-Link with 10 percent. Microsoft, which made a big push into the home/consumer market last fall has managed to capture only 8 percent marketshare.

"There are new competitors in this market for Cisco," Giancarlo says, "but this is a market where Linksys has competed extremely well. So I don't want to pretend that we are experts in this market. One of the reasons why we made a decision to purchase Linksys was because they are experts in this market. In spite of everything else that took place in this market over the last six months, Linksys has picked up additional market share points. We believe that we'll be able to compete very favorably in this market."

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