[Ecommerce] Cisco to enter consumer home-networking gear market by buying Linksys Group

[Joy Spencer]

Cisco to Buy Home Networker Linksys Group
By REUTERS
March 20th, 2003
Filed at 12:45 p.m. ET

CHICAGO ( Reuters) - Cisco Systems Inc. (CSCO.O), 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 consumer home-networking gear market.

The acquisition of privately held Linksys, Cisco's biggest deal since 
May 2000, is part of the San Jose, California-based company's strategy 
to target growth in such emerging markets as wireless, security, storage 
area networking and Internet voice and data transmission, also known as 
IP telephony.

The deal 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.

``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 almost 54 
million Cisco shares at the end of last year.

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

A PRODUCT FOR MOM

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.

Cisco previously failed in the home networking market because it entered 
too early in its growth, Scheinman said. Cisco also will try to protect 
Linksys, which competes with privately held Netgear Inc. and Taiwan's 
D-Link Corp. (2332.TW), by having it operate as a separate unit, a first 
for a Cisco acquisition.

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.

Shares of Cisco were down 12 cents to $14.10 in Thursday midday trading 
on the Nasdaq.

Some analysts expressed concern about company sales in light of comments 
about weakness in the networking sector made by contract manufacturer 
Jabil Circuit Inc. (JBL.N) late 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.

Cisco said it expects the deal, its third announced this year, to close 
in the fourth quarter of Cisco's 2003 fiscal year, ending in July.

It expects the acquisition of Irvine, California-based Linksys, the No. 
1 maker of home networking gear, to cut its fiscal 2004 net income by no 
more than 1 penny a share. Excluding one-time items, it anticipates that 
the deal will add about 1 penny a share to its fiscal 2004 earnings.

Thereafter, the deal will add to the company's bottom line, both before 
and after charges, the company said.

As part of the deal, Cisco also will assume all outstanding employee 
stock options at Linksys, which was founded in 1988, employs 308 people 
and had sales of $429 million last year. Cisco, which announced the deal 
in the first hours of the U.S. military campaign against Iraq, typically 
prefers to buy small or medium-sized, private companies in emerging 
technologies.




-- 
Joy Spencer
Consumer Project on Technology
P.O. Box 19367
Washington D.C. 20036

1.202.387.8030
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