Cisco Continues to Cut Off Consumers


There are some who believe Cisco , the one-time backbone of the Internet, should never have made the foray into consumer end markets to begin with, but now having fallen so low, it's maintained a steady pace of shedding businesses that aren't enterprise-faced. The latest effort is the rumored decision to unload its Linksys business, the maker of ubiquitous but hardly critically acclaimed home networking equipment.

Long ago and far away
Cisco bought Linksys back in 2003 for $500 million at a time when it started making a number of consumer-oriented purchases. It bought web conferencing outfit WebEx a few years later for $3.2 billion and the Flip camera a few years after that, paying more than a half billion dollars for the latter. Cisco introduced the Umi home videoconferencing system two years ago only to kill it off earlier this year.

It's been an expensive foray for Cisco, one which has hurt the equipment maker's performance in recent years. But just as fast as he got on the consumer train, CEO John Chambers is getting out. Last year he admitted Flip flopped and he got out. Earlier this year, tiny SalesCrunch offered Chambers $1 for WebEx.

Many of the problems seem to stem from Cisco's inability to understand the consumer market. They were too slow to offer higher-quality Flip phones, and smartphones soon eclipsed the need for a dedicated video camera (it's said Apple's original iPod Nano with a phone was designed with the Flip in mind). WebEx is criticized for being outdated, unable to utilize more technological capabilities like social networking and analytics, unlike Citrix System's GoToMeeting or even SalesCrunch's offerings. Umi was simply too expensive when you could get Skype for free.

Linksys is also critiqued for being underpowered, and considering the devices tend to work for years without needing to be upgraded, they carry small margins. It didn't help that Cisco angered many of its customers by forcing them to become members of its Connect Cloud network where it would then monitor their Internet activity. Cisco had to backpedal very quickly and perhaps it feels it's just best to get out altogether.

Go-go growth
Cisco also tried to become a growth company again and thought by offering consumer products it could sparkle with investors once again, but disastrous earnings in 2011 and calls for Chambers' ouster led the equipment maker to undertake a massive overhaul of the company. That included several rounds of layoffs and the wholesale divestiture of many of those ill-advised acquisitions.

Although we've heard rumors of a Linksys sale in the past, this time the grapevine seems sturdier with Barclays as the advisor on the deal.They're the ones helping Google unload the Motorola Home division.

Going once, going twice...
As to who might be interested in buying it, there are a bevy of possibilities, including rivals Netgear , Belkin, D-Link, and even drive maker Western Digital , which recently introduced the My Net N900 router. Yet the problem might be there really wouldn't be any takers.

Bloomberg has described the Linksys business as "mature," meaning a buyer wouldn't be able to advance the line or expect it would result in a big sales producer. So buying it for its research and development would mean Cisco would have to offer a big discount to the price it paid for it back in the day. There is always the possibility a Chinese company would want access to the technology.

Like a battleship turning around, Cisco's U-turn has been a long, wide arc that it has yet to complete. The elimination of the consumer from its lineup is but one portion of the transformation; it needs to ensure its enterprise level switches and routers can generate the revenues and margins investors remember.

The stock has rebounded 35% from the lows it hit this past summer and is in sight again of its highs. Selling Linksys would sever the link with a horrible decision to break ranks and be all things to all customers. At least Cisco's recognized the error of its ways, and with some $45 billion in cash and equivalents in the bank, it has a financial cushion to weather future downturns. With its enterprise value selling at just seven times its free cash flow, I still find the equipment maker a compelling investment opportunity.

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