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


Growth by Acquisition: The Case of Cisco Systems

As I said, if you pay $500,000 to $2 million per person for the people you acquire, and you lose 30 to 40 percent of those people in the first two years, you've made a terrible decision for your investors. If you go back and look at how many companies in this kind of acquisition deal lose 30 to 40 percent of their people in that period, it will shock you. That is why acquisitions in our industry fail.

S&B: What is special about your culture that allows you to integrate the acquisitions so fast?

JOHN CHAMBERS: Again, you have to look at why many acquisitions fail. It's because the companies are left too independent for too long. Or worse, they know they are eventually going to combine, but you leave them alone and the politics begin and people begin to jockey over who is going to get which positions. We've learned that to make it successful you have to tell the employees of the companies up front what you are going to do, because trust is everything in this business. You have got to tell them early so you don't betray their trust later.

To move quickly, you want to find the advantages and disadvantages of scale. Usually, we keep engineering independent. We combine marketing and manufacturing and the information systems. We empower very talented people and then hold them accountable for the results. But we are also there to help them from making the wrong turns.

StrataCom is already integrated. The largest acquisition in terms of dollars that the industry had ever seen is something we integrated into our business in four months.

S&B: Out of the 14 companies you have acquired, how many of the founders/C.E.O.'s stayed with Cisco?

JOHN CHAMBERS: About half.

S&B: Is that important? Do you try to get those people to stay or is it better if they leave?

JOHN CHAMBERS: I missed one acquisition that I should have gotten because of a chemistry issue with the company's president. His was not a chemistry that would have fit into Cisco. The mistake I made was that the chemistry of the company's other leaders and employees would have fit in fine with ours. I should have bought the company, told the president up front that he wouldn't be part of the future and he would probably have left.

But the real issue is that I want to retain the majority of an acquired company's employees.

S&B: How do you do that?

JOHN CHAMBERS: You understand what is important to them, what motivates them. And you empower them. Take Andy Bechtolsheim, the founder of Granite, one of the companies we wound up acquiring. The first thing I asked Andy, who was also a co-founder of Sun Microsystems, was, "What's important to you? What do you want to do in life?" He said, "I want to take care of my employees here, make sure they are successful, and my customers. But I like to build products that sell billions of dollars." I said, "We're going to get along great." Once I understood how to motivate him, we were off and running.

S&B: The genesis of your acquisition strategy took place when Cisco was essentially invisible. People in your industry knew about you, but it is really only in the past year that the general business community has learned about you. What, other than size, prompted you to raise your profile?

JOHN CHAMBERS: Early on, we had no desire to be visible. Part of the reason was that there was no business advantage to publicity because most of our sales to our customers were direct. For our customers to hear about us in the press gave us no advantage. In addition, as a company, we never had the ego-need to be visible.

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