UPDATE: Cisco to buy Linksys in $500M stock deal

Cisco Systems Inc. is back on the acquisition road, with plans to snap up wireless vendor Linksys Group Inc. Thursday in a stock deal valued at US$500 million.

Linksys and Cisco both make products for the growing wireless LAN (WLAN) market, but Linksys is particularly strong among home users of WLAN access points and routers. Cisco sells similar products to corporations. The deal was struck so Cisco could enter the home and small business market for WLAN products, the company said in a release.

The companies have reached an agreement under which Cisco will issue about $500 million in common stock to purchase Linksys, based in Irvine, California, and cover its employee stock options, Cisco said. The deal is expected to close in the fourth quarter of Cisco's 2003 fiscal year, pending regulatory approval. That period ends in July.

Counter to Cisco's standard practice with acquisitions, it will continue operating Linksys as an independent unit, Cisco officials said during a conference call with analysts.

"Linksys' leading positioning in home networking offers a tremendous top-line growth opportunity for Cisco," said Dan Scheinman, Cisco's senior vice president of corporate development. "We believe Linksys has optimized the business model required for success in this market."

Maintaining Linksys' low-operating-expense model will be a key priority for Cisco, said Charlie Giancarlo, Cisco's senior vice president and general manager of product development. Giancarlo is the executive to whom the Linksys division will report.

Given the competitive pricing atmosphere of the consumer market to which Linksys caters, the organization's success depends on its ability to control costs, Giancarlo said.

One way Linksys has done that so far is through partnerships with outside design and product developers, including companies in locations with lower labor costs, such as China. Cisco is "committed" to continuing those partnerships, Giancarlo said.

Cisco does not anticipate any significant pricing changes on Linksys products, he said.

Cisco, based in San Jose, California, made numerous acquisitions in the 1990s as the company's stock price soared, but had scaled back those efforts over the last two years. The company bought Signalworks Inc., a maker of IP (Internet protocol) telephony software, on Wednesday, and purchased security software company Okena Inc. in January.

Cisco initially thought it would internally build a consumer-focused wireless products portfolio, Scheinman said. But as it began developing plans, it decided that only a unit with a low-cost, high-volume operating model could succeed, and that building such a unit would take several years and require an expensive up-front investment.

Buying Linksys, a company with a leading share of the market and an established brand name, will instead allow Cisco to "jump start" its entry, he said.

Shares of Cisco (CSCO) dipped slightly following the announcement, trading down 1.6 percent, at $14.00, at midmorning on the Nasdaq exchange.