Hot
off the Press - NEWS Analysis
by
Keith Benicek, Editor
Cisco
snag Linksys, but just who does it help? The inside story.
Page 2
March24th,
2003
Networking equipment sales to the “SoHo” market are expected to grow from $3.7 billion in 2002 to $7.5 billion in 2006, according to 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.
But while the Home /SoHo market is very healthy, unexpectedly growing while the tech market in general is stagnant and the business networking market is in full decline, this is a very cut-throat business. Cisco/Linksys will have an especially tough time against other innovative and more diversified companies that make their own products such as D-Link, which is a Taiwan based manufacturing company with North America operations located also in Irvine California. This has the market analysts very concerned about the near and long term benefits of this deal for Cisco.
Analyst Rachna Ahlawat from Gartner Inc. said the announcement was surprising, but the product line were “complimentary”, while Merrill Lynch analyst Tal Liani's view of the deal wasn't so charitable. "Entering this market signals further weakness in Cisco's core business," he said in an interview with Dow Jones Business News. "Cisco's move is against the traditional direction of company expansion, by going down market to a low-end, highly competitive market, where Cisco has no relative advantage."
For the most part, neither have any overlapping product lines except in one important growth area, where both have well branded Cable Modems. Cisco’s product is essentially their only product in the same market sector Linksys lives.
What exactly is Cisco buying with the acquisition of Linksys? Certainly they are getting instant cash flow from a profitable company, so long as the Home / SoHo market continues to grow and as long as Linksys
remains competitively
innovative. We all know how acquiring big companies do a splendid job
of messing up “a good thing” from a smaller sibling.
Cisco is also getting brand recognition, by inference in the ownership of Linksys, in a market that know little of Cisco. But remember that for now it least, Cisco is insisting that Linksys will be autonomous. So how will that help?
Finally, remember that Cisco is only acquiring the manufacturing “arrangements” that Linksys has with its product vendors in Taiwan and Mainland China; not actual internally owned low cost manufacturing facilities.
Companies that are their own supplier, tend to get newer technology and innovative products to market faster. It is only those first few months, perhaps a Quarter or two, that a company can get a premium price (and higher margins) for a new technology. While exceptions to this axiom exists successfully, such as up-in-comer Belkin Corporation of Compton California; others like SMC, which has lost its exclusive product supply arrangement with once parent Accton, is falling farther and farther behind former pier group companies like Linksys, D-Link and Buffalo.
Who may benefit most by this acquisition of Linksys buy Cisco, it just might be all the other players in that market space. Time will tell.
AP reported that Merrill sees Cisco's acquisition of Linksys as a net negative – “Merrill Lynch views CSCO's acquisition of Linksys as a net negative, citing: 1) margin pressure in the small office/home office mkt, 2) CSCO's lackluster track record in the consumer mkt, 3) no apparent synergies between CSCO's and Linksys' distribution channels, and 4) their belief that entering this mkt signals further weakness in CSCO's core biz. Maintains Neutral rating”.
The acquisition is Cisco's second in two days as it also agreed on Wednesday to purchase SignalWorks, a software company specializing in IP phone technology, for $13.5 million in stock.
Shares of Cisco recently
traded at $14.10, down 12 cents, or 0.8%, on volume of 66.3 million. 66.9
million shares is the average daily volume.
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