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Cisco to acquire home networking firm Linksys for $500 millionBy Matthew Fordahl, Associated Press, 3/20/2003 16:33
Cisco already dominates the network equipment market for large
companies and service providers, with a business that still draws
high profits despite a sales slump that has hammered all gear
manufacturers over the past two years.
With Linksys, Cisco will enter an even dicier environment in
which profit margins are slim and prices constantly driven downward
by stiff competition from rivals including Microsoft Corp.,
Netgear, D-Link and Intel Corp.
Still, Cisco executives believe the growing adoption of consumer
high-speed Internet connections as well as increasing prevalence of
more than one computer at homes will drive demand for reliable
networking equipment for the home.
''Home networking is quickly becoming a mass market,'' said
Charlie Giancarlo, Cisco's senior vice president of corporate
development ''This is the right time and the right way to enter
it.''
Privately held Linksys, based in Irvine, Calif., has one of the
most extensive lines of routers and other equipment used in home
networks. It currently markets 70 devices, which are sold to
consumers at retail stores and online.
Linksys had sales of $429 million last year, a 24 percent growth
rate over 2001. The company has been on Inc. magazine's list of the
fastest growing private companies in the United States for five
consecutive years.
Networking equipment sales to small and home offices are
expected to grow from $3.7 billion in 2002 to $7.5 billion in 2006,
according to data compiled by the research firms Dell'Oro Group and
Synergy.
The number of homes with broadband is increasing by 35 percent
each year, and the number of networked homes by 51 percent
annually, said Dan Scheinman, Cisco's senior vice president of
corporate development.
Though chief executive John Chambers has been a vocal supporter
of consumer broadband and has criticized rollout delays, Cisco has
offered few products geared for the home. Cisco's routers and
switches are found in the back rooms of large corporations and
government agencies.
Cisco considered developing home networking products in house or
partnering with another company, but ultimately decided it would be
more effective to acquire a company already in the business,
Giancarlo said.
The strategy has served Cisco well over the years. Between 1993
and December 2000, it acquired 71 companies before the tech slump
battered Cisco's stock price.
Linksys will be operated as a division of Cisco and the brand
will be continued. Founded in 1988, it has 308 employees. Cisco
said there are no plans to cut the work force.
A Linksys spokeswoman did not immediately return calls seeking
comment.
Rachna Ahlawat, an analyst at Gartner Inc., said the
announcement was surprising but, she added, Cisco's and Linksys'
product lines compliment each other.
''I wouldn't call it risky, but it's a different kind of
acquisition than in the past,'' she said.
Cisco said the acquisition, which has been approved by both
companies' boards, will dilute its fiscal 2004 earnings by no more
than a penny per share and will add a cent to its per-share pro
forma profits. The deal, which is scheduled to close in Cisco's
fiscal fourth quarter, also is subject to approval by antitrust
regulators.
Shares of Cisco fell 18 cents to close Thursday at $14.04 on the
Nasdaq Stock Market.
On the Net:
Cisco Systems: http://www.cisco.com
Linksys: http://www.linksys.com
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