Linksys’ Doughnut Deal
Sitting in his office in early 2002, Victor Tsao said he realized things would have to change.
Yearly sales at his small but growing Linksys Group Inc. were approaching the $400 million mark,thanks to nearly 30% annual expansion. The seller of home networking gear soon would outpace the plans he and wife Janie had for the company.
The Tsaos grasped that Linksys would need to move into more global markets, expand research spending and hire more people. While Linksys was flush with cash, expansion would be costly. The privately held company needed more money.
“It was going to be M & A; or IPO,” Victor Tsao said.
So Tsao put out feelers to investment banks. By spring of last year, he’d settled on New York’s CS First Boston Corp.
The task: determine if a buyout outweighed a public stock offering, something Linksys long had seen in its future.
“We had no urgency at all then,” Tsao said.
CS First Boston, which counted Cisco Systems Inc. as a client, called up Chief Executive John Chambers to find out if he was interested.
Cisco, the dominant maker of corporate networking gear, had watched the market for consumer devices take off without it.
“John Chambers dearly wanted to get into it,” Tsao said.
So Tsao flew to San Jose to meet with Chambers last summer. The two met in Cisco’s briefing room at the company’s San Jose campus.
There, they munched on glazed doughnuts and discussed home networking.
Linksys had everything going for it. Market watchers predicted the home networking market,pegged at $3.5 billion yearly,would double in size in three years. The driver: wireless devices used to link home computers to each other and the Web.
Linksys had done a masterful job marketing the company as a consumer brand,just as Cisco has with Corporate America. And Linksys, which contracts out the making of its products to Asian factories, has profited in a market where buyers expect low prices.
“We’ve been profitable every single quarter,” Tsao said.
Cisco would be the right fit for Linksys, Chambers told Tsao. It had the cash and distribution muscle to drive Linksys’ growth, he said.
Even so, the deal poses challenges for Cisco. The company doesn’t have a track record selling to consumers or playing in the cutthroat retail market.
Tsao said he was impressed with Cisco’s research and development and its geographical reach.
Chambers “was a very good guy, tremendous charisma,” he said.
The soft-spoken Southerner Chambers did most of the talking at the meeting.
“He didn’t even finish his doughnut,” Tsao said.
Before departing, Chambers gave Tsao his home number.
“He said if had any concerns, just call,” Tsao said.
Tsao flew back to Irvine. He said he knew the deal would be a good one.
“There’s a lot of synergy,” Tsao said.
But there was a sticking point. Tsao, who’d spent a good part of his career working for companies such as Taco Bell Corp. and TRW Inc., wasn’t sure if he again wanted to be part of a big company.
“It never really appealed to me,” Tsao said. “Linksys is the smallest company I’ve ever worked for.” Besides, Taiwanese immigrants Tsao and wife Janie started Linksys from scratch, leaving comfortable computer systems jobs in 1988.
But joining Cisco appealed to the Tsaos. They met with Cisco officials several times in the next nine months looking to hammer out a deal. If the Cisco buyout didn’t work out, the fall back was a public offering, possibly in 2004.
Last month Cisco and Linksys put the final touches on a deal that in today’s market would be jut as good as a public offering.
Under the deal, the Tsaos get to run Linksys as a separate unit,the first time in Cisco history an acquisition has gotten to keep its brand.
Cisco’s “acquired 80 companies over their 18 year history,” Tsao said. “Linksys is its 81st.”
And the Tsaos get to keep Linksys in Irvine with their 300-some workers. The price for Cisco: $500 million in stock.
Tsao declined to say how much of Linksys he and his wife own, though it’s believed to be the vast majority.
, Andrew Simons
