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 / Second Quarter 1997 / Issue 7(originally published by Booz & Company)


Growth by Acquisition: The Case of Cisco Systems

Starting with the $89 million acquisition of Crescendo, a switch maker, in the fall of 1993, Cisco has set a relentless pace for acquisitions. Over the years, a buying process has evolved that stresses a "blitzkrieg" mentality for every purchase. Companies are evaluated, approached, acquired and integrated with remarkable speed and efficiency, given the usual legal and cultural complexities surrounding such deals. Until the purchase in 1996 of StrataCom for $4.5 billion in stock, its biggest acquisition by far, Cisco never used an underwriter, preferring to pursue small, privately held technology companies in uncomplicated and friendly deals.

According to Charles Giancarlo, vice president for business development at Cisco, the underlying premise of every acquisition is "time-to-market." Cisco has become dominant in its industry in recent years by using its bulk and marketing muscle and by being first into emerging markets.

"We have a saying here, 'Early if not elegant,' " Mr. Giancarlo explains. "If you are a year late, that market might not exist anymore. We'd rather learn from our mistakes." Indeed, management has another blunt saying, "If we are not making mistakes, we aren't moving fast enough."

With this philosophy, Cisco has actually made few mistakes. Management believes there are two keys to a successful acquisition: doing the homework to select the right company and applying an effective and replicable integration process once the deal is struck.

Nearly all the acquisitions have been completed in the same regimented manner, putting a conservative spin on a decidedly non-traditional approach to growth. The Cisco rules for acquisition, in essence, create a blueprint for every takeover. The goal is to be smoothly shipping the acquired company's products under the Cisco label by the time the deal is officially closed, usually in three to six months.

For example, even before the ink is dry on a deal, Cisco's information technology department sets in motion an aggressive integration of the new company's technology. A six-person I.T. team is dedicated to the task and follows a strict methodology. Without much debate, the group integrates all systems, including toll-free support numbers, electronic mail, sales automation, Web sites and product order systems. The idea, says Cisco's chief information officer, Peter Solvik, is to present the acquired company to its customers as part of Cisco as soon as possible, usually within 100 days.

Mr. Giancarlo and his director of business development, Michelangelo Volpi, serve as point men for each acquisition. But they stress that the acquisition process has become so much a part of Cisco's culture that everyone, from sales people to engineers, is attuned to potential deals. Mr. Giancarlo insists on having leaders from the various business units involved along the way because an acquired company must be embraced by an internal group with a show of ownership or sponsorship "or it will flounder and die."

In 1993, Cisco management created a matrix for emerging markets (which it constantly updates) and has identified niches, from Internet hardware and software to asynchronous transfer mode (A.T.M.) switches and routers, in which it intends to become a market leader. These markets are found through conversations with customers and by reading the trade press, attending industry conferences and listening to an endless stream of entreaties that pour into the company from bankers and entrepreneurs.

Once a market is identified, Cisco prefers to have its internal R&D organization develop a product. At least 70 percent of its products are developed internally. But the rule of thumb is that if the company does not have the resources to become a market leader within six months, it looks to buy its way in.

Over the past three years, Cisco's reputation has preceded it into new markets and the company now has established channels of information through which it learns about potential takeover targets. The sales force is a primary conduit, constantly providing management with feedback on competitors, both established and in start-up mode, that are tough to sell against. Internal marketing teams also scan the horizon for candidates, and a vast network of venture capitalists, investment bankers and entrepreneurs now seek Cisco out as a primary exit strategy when the time has come to achieve liquidity.

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