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Cisco Systems (Nasdaq: CSCO) has expanded its networking reach from the corporate world into homes with its purchase of privately held Linksys. Synonymous with business routers and switches, Cisco may one day dominate home Internet connectivity, too. Linksys is the most popular home-networking company, offering both wireless and non-wireless high-speed online products. It's a new field for Cisco, but one it's expressed interest in before. The company will pay $500 million in stock for Linksys, which generated sales of $429 million last year. It's hard to tell if this is a better deal for Cisco than Linksys, but Cisco says the promise for the home-networking segment is huge. Citing studies from research groups Dell'Oro and Synergy, Cisco claims the market for home- and small-office networking products could grow to $7.5 billion in 2006 from $3.7 billion last year. There are some concerns about the purchase, including the margin deviations between Cisco's traditional business and the home-networking business. Cisco's gross margins topped 70% in the recent quarter, while gross margins for companies like Linksys trend around 30%. Cisco believes it can make Linksys' business more profitable, however. Also, Cisco takes on new risks by entering a new market. Post-acquisition, Linksys will operate as a division of Cisco, keeping its brand. Cisco hopes to be rewarded for taking a chance by letting the home-networking company do its own thing, while providing new sales channels and outlets. The deal will close in Cisco's fiscal 2003 fourth quarter, and will dilute earnings by no more than $0.01 in fiscal 2004. Cisco's head of acquisition activities, Dan Scheinman, summed up the purchase and excitement surrounding it, saying, "Finally, a product my mother uses." LouAnn Lofton owns shares of Cisco Systems.
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