Advertisment

Cisco to buy home networker for $500 mln in stock

author-image
CIOL Bureau
Updated On
New Update

Ben Klayman



Reuters

Advertisment

CHICAGO: Cisco Systems Inc., the No. 1 maker of equipment that directs Internet traffic, on Thursday said it would pay about $500 million in stock to buy Linksys Group Inc. in a bid to enter the competitive consumer home-networking gear market.

The acquisition of privately held Linksys, Cisco's biggest deal since May 2000 and its third so far this year, is part of the San Jose, California-based company's strategy to target growth in such fast-growing markets as wireless, security, storage networking and Internet voice and data transmission.

The deal, announced in the first hours of the U.S. military campaign against Iraq, will bring Cisco in direct contact with consumers as opposed to its more traditional large corporate customers in the enterprise sector and brings new risks.

Advertisment

"It certainly is a deviation from typical Cisco businesses. Going after consumers does carry more risk," said Shawn Campbell, analyst with Northern Trust Corp.'s asset management arm, which owned 53.9 million Cisco shares at the end of 2002.

Home networks allow consumers and small offices to share high-speed Internet connections, files, printers, digital photos and gaming over a wired or wireless local area network.

A PRODUCT FOR MOM

Advertisment

Cisco officials acknowledged the risk in serving consumers directly, but said the growth opportunity in high-speed Internet connections was too good to pass up.

"Finally a product my mother uses," Dan Scheinman, head of Cisco's acquisition activities, said in an interview. "We understand on the gross (profit) margin side that this is not a Cisco-like business, but if the business model can deliver a bottom line that looks more like Cisco then it can fit into our portfolio."

The home networking business is very price sensitive, carrying gross margins that at best are in the mid 30 percent range, he said. That compares with Cisco's record margins of 70 percent in its most recent quarter.

Advertisment

Cisco, which expects the deal to close in its July quarter, previously failed in the home networking market because it entered too early in its growth, Scheinman said. Linksys, which competes with privately held Netgear Inc. and Taiwan's D-Link Corp., is the No. 1 maker of home networking gear with sales last year of $429 million.

HOME NETWORKING MARKET GROWING

The market for networking products for consumers and home and small offices is expected to grow from $3.7 billion last year to $7.5 billion in 2006 worldwide, Cisco said, citing data from research firms Dell'Oro Group and Synergy.

Advertisment

Shares of Cisco closed down 18 cents, or 1.3 percent, at $14.04 in Thursday trading on the Nasdaq. Analysts expressed concern about Cisco's sales in light of comments about weakness in the networking sector made by contract manufacturer Jabil Circuit Inc. on Wednesday.

Cisco shares also were being pressured by a joint venture announced late Wednesday by smaller rival 3Com Corp. and Huawei Technologies, China's largest telecommunications equipment maker, to sell their networking gear to large corporate customers, analysts said. Cisco has sued Huawei for copying its intellectual property and violating trademarks.

"This is a new frontier for Cisco and it's a necessary one because of the slowing in their core enterprise market and the increased potential competitive threat in their bread-and-butter (switch and router) markets," said Credit Lyonnais analyst Gabe Lowy, who rates the stock a "hold" and personally owns shares. Credit Lyonnais does not do banking with the company.

Credit Suisse First Boston advised Linksys on the deal, while Morgan Stanley provided a fairness opinion to Cisco.

tech-news