By Stacy Cowley and Tom Krazit, IDG News Service
MARCH 20, 2003
Content Type: Story
Source: IDG News Service
Cisco Systems Inc. has announced plans to snap up wireless vendor Linksys Group Inc. in a stock deal valued at $500 million.
Linksys and Cisco both make products for the growing wireless LAN market, but Linksys is the leading manufacturer of WLAN products for the consumer and small office/home office market. Cisco sells similar products to corporations, and the deal, according to analysts, will provide Cisco economies of scale for a WLAN product that covers all segments of the market from the enterprise to the home.
The companies reached an agreement under which Cisco will issue about $500 million in common stock to purchase Linksys, based in Irvine, Calif., and cover its employee stock options, Cisco said. The deal is expected to close in the fourth quarter of Cisco's 2003 fiscal year, pending regulatory approval. That period ends in July.
Counter to its standard practice with acquisitions, Cisco will operate Linksys as an independent unit, Cisco officials said during a conference call today with analysts.
"Linksys' leading positioning in home networking offers a tremendous top-line growth opportunity for Cisco," said Dan Scheinman, Cisco's senior vice president of corporate development. "We believe Linksys has optimized the business model required for success in this market."
Maintaining Linksys' low-operating-expense model will be a key priority for Cisco, said Charlie Giancarlo, Cisco's senior vice president and general manager of product development. Giancarlo is the executive to whom the Linksys division will report. Given the competitive pricing atmosphere of the consumer market that Linksys caters to, the organization's success depends on its ability to control costs, he said.
One way Linksys has done that so far is through partnerships with outside design and product developers, including companies in countries with lower labor costs, such as China. Cisco is "committed" to continuing those partnerships, Giancarlo said.
Cisco doesn't anticipate any significant pricing changes on Linksys products, he said.
Cisco made numerous acquisitions in the 1990s as its stock price soared, but it has scaled back those efforts in the past two years. The company bought Signalworks Inc., a maker of IP telephony software yesterday, and purchased security software company Okena Inc. in January.
Cisco initially thought it would internally build a consumer-focused wireless products portfolio, Scheinman said. But as it began developing plans, it decided that only a unit with a low-cost, high-volume operating model could succeed, and that building such a unit would take several years and require an expensive upfront investment.
Buying Linksys, a company with a leading share of the market and an established brand name, will instead allow Cisco to jump-start its entry, he said.
Linksys dominates the booming home WLAN market, which accounted for 55% of all WLAN sales last year, according to Aaron Vance, an analyst at Synergy Research Group Inc. in Phoenix.
Craig Matthias, an analyst at FarPoint Group in Ashland, Mass., said the Linksys acquisition will provide Cisco with "incredible" economies of scale as it sources common parts such as WLAN chips for the combined companies and then spreads those costs across a broad product line. That line ranges from a four-port WLAN router from Linksys that sells on the Web for $65 to Cisco enterprise-class access points priced at $420 and up through resellers.
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