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


Growth by Acquisition: The Case of Cisco Systems

JOHN CHAMBERS: When we looked more closely, our concerns were raised. For example, the statistics indicate that 50 percent of large-scale mergers fail. It is important to go into them realizing your odds of failure are that high. Mergers can fail on a number of levels. They can fail in terms of their benefit to the shareholders, customers, employees and business partners. Those are the four constituencies we use to evaluate decisions. A decision has to be right with each of those constituencies or we would not go forward with it.

S&B: What made you believe you could not overcome those challenges?

JOHN CHAMBERS: If you merge two companies that are growing at 80 percent rates, you stand a very good chance of stalling both of them out. That's a fact. When you combine companies, for a period of time, no matter how smoothly they operate, you lose momentum. Even today, as good as we are at acquisitions -- and I think we really know how to do them today -- when you make the acquisition, there is a period when you lose business momentum. Our industry is not like the banking industry, where you are acquiring branch banks and customers. In our industry, you are acquiring people. And if you don't keep those people, you have made a terrible, terrible investment. We pay between $500,000 and $2 million per person in an acquisition, which is a lot. So you can understand that if you don't keep the people, you've done a tremendous disservice to your shareholders and customers.

So we focus first on the people and how we incorporate them into our company, and then we focus on how to drive the business. That takes time. But as I said, in a merger of equals, you stand a very good chance of stalling out both companies when you take that time. It can be a major distraction to both.

S&B: What else was involved in your decision to avoid a merger of equals?

JOHN CHAMBERS: When we looked at the visions of our potential partners, as well as where both those companies were going, we found that their direction was different from ours. That was crucial.

If you look at the troubled merger of Bay Networks [a major Cisco competitor that was created by the combination in 1994 of SynOptics Communications, which had been one of Cisco's potential partners, and Wellfleet Communications], you would see that the corporate presentation of Wellfleet and the corporate presentation of SynOptics existed in different universes from each other.

As for us, we are a very customer-driven company. We don't get involved in the religion of the technology. But Cabletron, the other company we looked at, was very technology-driven. The people there believed that A.T.M., for example, was the future and they were very much technology bigots. It does not mean one was right and the other wrong. It just demonstrated that our visions were dramatically

And while we thought the distribution channels might overlap and actually help us, we came to see a lot of potential contention that would overlap negatively. We felt, for example, that as much as 60 percent of the channels might actually be driven to another vendor if we combined our two companies. That was the analysis behind our decision not to merge.

S&B: You had the advantage of having done joint projects with both your potential merger partners. What impact did that have on your strategy?

JOHN CHAMBERS: The fact that we had worked with both before made a huge difference in our deliberations. The smaller projects worked fine. But the big joint projects did not work well at all. That did not bode well for a merger. And in terms of future alliances, what would happen to our relationships with other companies in the industry if we did this merger with one of them? We felt there would be negatives.

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