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Cisco Buying Linksys for $500M

Cisco Systems Inc. (Nasdaq: CSCO), the leading supplier of 802.11 hardware, is buying Linksys Group Inc., the number two wireless LAN equipment vendor (see Cisco to Buy Linksys).

The acquisition, due to close in the fourth quarter of Cisco's financial year, will be made with common stock "with an aggregate value of approximately $500 million to acquire the Linksys business and to assume all outstanding employee stock options," states the Cisco press release.

According to statistics from 802.11 analysts at Synergy Research Group Inc., this gives Cisco a 25.6 percent share of the market (2002 revenues), way ahead of Buffalo Technology (USA) Inc., which would be second in the league at 10 percent (see 802.11 WLAN Shipments Double).

It also makes Cisco the leading supplier of 802.11 equipment to both the enterprise market -- a position it holds already with 31.5 percent of the market -- and the leading supplier for the home and small office/home office (SOHO) market, the position Linksys holds, with a 20.7 percent share.

Privately-owned Linksys has 308 on staff and recorded revenues of $429 million in 2002, a 24 percent increase on 2001, according to Cisco, which plans to retain the current staff. No one from Linksys was available for comment, though a message on the company's Website from president and CEO Victor Tsao stated that "these are exciting times. In the near term it is 'business as usual.' The future possibilities for Linksys as part of Cisco are limitless."

Once the acquisition is complete, the Linksys business, which will retain its brand, will be a separate division within Cisco, though its revenues will be consolidated in Cisco's financial results.

So how do the two companies' products fit together? While Cisco's 802.11 product line is aimed mostly at enterprise users, Linksys makes and supplies standards-based 802.11b (11-Mbit/s over 2.4GHz) and 802.11a (54-Mbit/s over 5GHz) access points, PC cards, gateways, and routers for home and small business users. It is one of the companies already supplying pre-standard 802.11g (54-Mbit/s over 2.4GHz) products (see Linksys Ships 802.11a/g Cards and Linksys Ramps Up 802.11g). It also makes fixed networking kit for the home and small office.

"This is a significant new opportunity for Cisco" as the number of broadband homes and the number of networked homes is increasing dramatically, said Charlie Giancarlo, Cisco's senior vice president and general manager of product development, during a conference call. "The home networking market is at a critical growth point, and this is the right time and the right way to enter this market." (See U.S. Tops DSL League Table).

Linksys was an attractive acquisition target not only because of its strong market position, said Cisco's senior vice president of corporate development Dan Scheinman, but also because it has "a low expense model that maximizes profitable returns." One way it achieves this is by partnering "with original device manufacturers [ODMs] for development and production, and Cisco remains committed to these relationships."

Giancarlo admitted that Cisco had been considering entering the market by itself and had been talking to partners in Asia about this. "But we realized it would take two to three years to build it up." The acquisition allows Cisco to take an immediate and strong position in the market, he added.

"This makes perfect sense," says Richard Webb, wireless LAN market analyst at Infonetics Research Inc.. "The home and small office wireless networking sector is a high growth market, and it wouldn't make any sense for Cisco to develop its own products."

Giancarlo says Linksys products sell at a premium to the average price in the consumer/SOHO sector, and that there are plans to add features that will help retain those premium prices in what is a highly competitive market

Infonetics' Webb says Cisco would do well to bolster the security and VPN capabilities, which would keep it ahead of competitors like D-Link Systems Inc. and Netgear Inc.

Today's announcement may not be such good news for Dell Computer Corp. (Nasdaq: DELL), which sells a wide range of Linksys equipment and is regarded as a competitor by Cisco. As this story went to press Dell had not returned our calls for comment.

So as Cisco enters the home and small-office market by way of an acquisition -- its second this week (see Cisco Snatches SignalWorks) -- does this represent a good deal for the networking giant and its shareholders? Webb thinks so: "I think this represents good value for Cisco. Clearly they have identified the market leader that has a strong brand in North America, so maybe they paid a premium for that. But this is a company Cisco can add value to."

As this article was published, Cisco's share price was $14.13, down 9 cents on Wednesday's closing price of $14.22.

— Ray Le Maistre, European Editor, Unstrung

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