Cisco buys low-end router leader

Cisco buys low-end router leader
Denver - Cisco Systems Inc.'s $500 million acquisition of The Linksys Group Inc. will augment Cisco's low-end router and Catalyst switch lines with a rich mix of small-office/home-office (SoHo) routers and residential gateways. But Linksys is so important a player at the low end of the market that some analysts speculated the acquisition may spark a Justice Department antitrust investigation.

Linksys offers more than 70 routers, gateways and wireless-access points, including cable-modem and DSL gateways. Cisco CEO John Chambers had told financial analysts earlier this year that he was keeping a particularly close eye on two competitors: Linksys and Huawei Technologies.

Cisco will issue common stock worth approximately $500 million to acquire Linksys and assume all outstanding employee stock options. Linksys chief executive Victor Tsao said last week that Cisco will leave the company virtually untouched, sending only support staff to aid marketing and promotion. He said he was not concerned about potential Justice Department scrutiny of the deal.

Linksys (Irvine, Calif.) will be a division of Cisco. The Linksys brand will continue to be used in reseller and retail channels, where the company's presence is strong. Tsao will report to Cisco senior vice president of product management Charles Giancarlo. Linksys has 308 employees; Cisco said it plans no layoffs.

Giancarlo told financial analysts last week that there is almost no overlap between the Cisco and Linksys product lines, since Linksys deals through retail and reseller channels while Cisco targets enterprise and service providers. He said Linksys holds a 39 percent share of North America's consumer and SoHo networking markets and a 57 percent share of wireless bridges, routers and gateways in retail channels.

No change in ODM model

Giancarlo said Cisco was impressed with Linksys' "superior operating model" and operating profitability. He said he expects no change in Linksys' reliance on the original-design-manufacturer (ODM) business model, under which many of its retail products are designed and manufactured in China and Taiwan.

Broadcom Corp. is a leading supplier of chip sets for Linksys' latest routers, which use prestandard implementations of 802.11g wireless LAN technology. Tsao said Linksys has no immediate plans to change suppliers.

Linksys was founded in 1988 with a focus on network adapters, remote-access servers and access gateways integrating dial-up and broadband connections. As SoHo connectivity took off in the late 1990s, the Linksys name became synonymous with residential gateways sold through retail channels.

Representatives of both CableLabs and the DSL Forum identified Linksys as the leader in integrating multiple functions into home routers and gateways.