Cisco Systems Inc. is reportedly looking to shed more of its consumer and SMB products, as it has hired an investment bank to explore the potential sale of its former Linksys unit. The move could be part of a much larger strategy in which the networking giant refocuses on enterprise business and sets up for a major acquisition to jumpstart growth.
Word broke over the weekend that Cisco tapped Barclays to shop Linksys, now a fully integrated unit in the Cisco that caters to small business and consumer wireless and basic networking needs. Cisco bought Linksys in 2003 as part of a large shift toward the consumer market. If sold, analysts do not believe it will fetch the $500 million Cisco paid.
Selling Linksys could be the last vestige of the Cisco’s decade-long flirtation with the consumer market. Linksys is so much more than consumer products sold through retail; its 9,000 reseller partners made Linksys products the favorite among small and distributed businesses around the world.
Cisco already jettisoned other consumer networking and video products, most notably the Flip video camera, which captures through the 2009 acquisition of Pure Digital Technologies. Cisco basically spent more than $1 billion on consumer and SMB products that failed to produce dominance from the living room to the boardroom.
To bolster its fortunes, Cisco is looking to do a major acquisition of an enterprise-level technology company. Many analysts believe Cisco is sniffing around virtualization specialist Citrix Systems Inc., perennial storage target NetApp Inc., networking optimization leader Riverbed Technology, and cloud computing giant Rackspace Hosting Inc.
“We’ve gone too long without any major M&A,” said Cisco CEO John Chambers at an analyst event in New York last week. “We got too slow. You’re going to see us be quicker.”
The goals for the next three to five years, as defined by Chambers and the Cisco management team, are substantial.
- Grow cloud and unified data center (now a $1 billion) by as much as 25 percent annually.
- Grow mobility enablement (now $3billion business) by 14 percent to 17 percent annually.
- Grow video and collaboration (now an $8 billion) by 6 percent to 8 percent annually.
- Grow services (now a $10 billion business) by as much as 11 percent annually.
- Grow security (now a $1 billion business) by 5 percent to 7 percent annually.
- And grow software sales (now $6 billion business) by as much as 16 percent annually.
Cisco is definitely looking for replacement revenue and growth catalysts for its commoditizing core networking and switching products. While Cisco maintains overwhelming market share in networking, the average sale price and margin for equipment is under tremendous pressure as the market shifts toward cloud computing and competitors step up displacement efforts.
On the horizon, software defined networks (SDN) being developed by Hewlett-Packard Co., Oracle Inc., VMware and a host of startups have the potential of severely disrupting Cisco’s cash cow products. Cisco isn’t sitting on the sidelines when it comes to SDN; it supports the Open Stack standard as well as invests in startup Insieme.
Diversification is nothing new for Cisco. More than one-third of Cisco’s current revenue comes from non-networking products and services. Cisco has spent billions developing physical security, video conferencing and telepresence, and virtualization-ready servers. The trouble, analysts say, is few of those individual products produce billion-dollar revenue streams.
Solution providers may find the shift toward a major acquisition a little disconcerting, especially given the radical changes Cisco had to make in 2011 to balance the business after seeing revenues and profits plummet. It was then that Cisco shed the Flip camera, cut more than 11,000 jobs and slashed $1 billion in spending. The result was positive, as Cisco returned to profitability and growth within a year.
If Cisco is intent on making a major acquisition, it will likely acquire a company with a substantial channel network. That will mean years of parallel channel management and eventual assimilation into the Cisco framework. Solution providers, particularly Linksys partners, can attest to the difficult and disruption such integration bring.
Could Cisco buy a NetApp or Rackspace? It has the cash. And acquiring either or other big targets would accomplish a tried-and-true Cisco method for satisfying Wall Street: buy EBITA, worry about real growth and viability later.
From a channel perspective, spinning off Linksys likely won’t be as painful as the assimilation. There two channels had a significant amount of overlap. Moreover, Cisco doesn’t lose much by giving up Linksys; partners invested in the Cisco program will likely remain active and support both companies’ products.
What analysts and solution providers should question is the soundness of Cisco’s acquisition intentions. HP pursued a series of acquisitions designed to rapidly expand revenue, product and capabilities, only to see more than $20 billion of $30 billion spent be written off and put the company in a precarious position where it remains.
Cisco likes to claim its clairvoyant in being able to foretell coming trends and make strategic shifts for it and partners to capitalize. It will use that same language in selling Linksys and making its next big acquisition; just as it did when it bought Linksys and Pure Systems.
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