Cisco Acquires Linksys for $500M

Cisco Systems
Thursday made serious overtures to tap the burgeoning home networking market
when it bid to acquire The Linksys Group Inc. for $500 million in stock.

Linksys, of Irvine, Calif., is a leading manufacturer of home networking
products with a line of wired and wireless products for consumers and small
office/home office (SOHO) users. Home networks rely on wireless technologies, such as
IEEE 802.11a, b or g, to allow consumers to share files, printers, digital music, photos and gaming, over a wired or wireless local area network.

Privately-held Linksys’ business model hinges on customers’ desire for increased mobility and flexibility around the home or office. Though long a seller of small business goods and services and a strong vendor for the enterprise, Cisco’s purchase of Linksys would considerably extend its tendrils into the consumer space.

Charlie Giancarlo, senior vice president and general management of product development at Cisco, talked about the possibilities of home networking in a conference call, noting that the driving point for the deal was the impending explosion the San Jose, Calif. firm sees in broadband adoption.

“55 million homes had broadband connections in 2002, and we expect that to grow to 179 million by 2006,” Giancarlo said. “Today there are 13 million home networks and we expect that to grow to 68 million homes by 2006.”

He cited figures from research firm Dell’Oro Group, which said it expects the home networking market segment to grow from $3.7 billion in 2002 to $7.5 billion in 2006 worldwide.

Noting that this push will lead consumers to demand more advanced applications, services and infrastructure with which to support them, Giancarlo launched into a litany of the benefits of choosing Linksys as Cisco’s first consumer-focused bid.

He said Linksys, with anywhere from a 30 to 40 percent home networking market share lead for certain products in North America, has the most extensive product line in home networking, with more than 70 products, such as wireless routers and access points to share broadband Internet connections, wireless network adapters and wireless print servers.

The firm also makes wired products, Giancarlo said, such as Ethernet routers and cable
modems, unmanaged switches and hubs, print servers and network attached
storage, to let users share digital music, photo and video media files.

Analyst view on the bid and competition

Zeus Kerravala, analyst and vice president in the enterprise infrastructure practice at Yankee Group, said he found it a “little bit odd” that Cisco, as strong a vendor of enterprise products as exists today, would tap the consumer market.

“This is interesting,” Kerravala told “It leaves me scratching my head a little bit. I agree that SOHO is growing, but rarely does a company succeed trying to sell to the enterprise and consumers.”

However, the crossover does happen. Kerravala cited 3Com’s attempt to tap the enterprise (just yesterday, 3Com entered into a supply deal with China’s Huawei, which is currently embroiled in a legal dispute with Cisco), and Microsoft’s difficulty in getting into the data center as examples.

But Kerravala thinks Cisco will play up the enterprise opportunities that exist from buying Linksys.

“My gut instinct is that Cisco will use these products to deliver lower cost products, perhaps for telecommuters of large corporations,” he said. Maybe a guy at Merrill Lynch who works home twice a week. Time will tell on this deal, but Cisco’s execution is good.”

Cisco, he said, will naturually face competition from 3Com, a home networking leader for consumers, and firms such as D-Link. Then there is Microsoft, who is making inroads in the home neworking space.

“But Microsoft and Cisco rarely compete on things — they do a lot of joint deals,” Kerravala said. “Cisco is entering a price game, which is what the consumer space is. The enterprise space is about value. There is a lot of money [in the consumer space] but it will be interesting to see how Cisco goes about it.”

Terms of the deal

Unlike previous acquisitions, Cisco plans to to let Linksys stand as its own separate division. Linksys CEO Victor Tsao will report to Cisco’s Giancarlo.

Linksys, whose 308 employees will keep their jobs, will have access to Cisco’s sales
infrastructure to address international markets and the service provider

Cisco will issue common stock worth $500 million to acquire the Linksys business and to assume all outstanding employee stock options. Cisco expects the acquisition to be dilutive by no more than 1 penny to its FY2004 GAAP EPS. Exclusive of acquisition charges, Cisco anticipates this transaction will add approximately $0.01 to its FY2004 pro-forma EPS. The transaction is expected to close in Q4 2003 and will be accretive to both GAAP and pro-forma earnings thereafter.

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