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


Growth by Acquisition: The Case of Cisco Systems

When we made the decision to make our first acquisition, we were on a 60-percent-a-year growth curve. At that time, our competitors -- 3Com, Bay Networks and Cabletron -- were growing at 35 to 45 percent. Most companies would have been ecstatic at 60 percent because they would be growing almost 50 percent faster than their key competitors.

But guess what? Companies like Fore, Ascend and Cascade were growing even faster than we were. As a result, we realized that they were going to do to us what we were doing to I.B.M. if we were not able to move even quicker. We realized that we had to have some way to have the advantages of a big company while acting like a small company from a product development point of view. That's the point when we decided to break ourselves into business units for development while retaining big-company influence by leveraging our strengths in manufacturing and distribution and finance across the entire company.

Let me give you an example. We took a device like Crescendo's networking product, and within 18 months, we had a $500 million run rate. No small company could go from $10 million to $500 million in 18 months. They just can't scale. But we could scale because of our distribution, financial and manufacturing strengths.

S&B: What are the key criteria for a successful acquisition?

JOHN CHAMBERS: There are really four key issues, and for big acquisitions, there is a fifth. We do not do mergers or acquisitions or partnerships when there is not alignment around these issues.

First, if your visions are not the same -- about where the industry is going, what role each company wants to play in the industry -- you are constantly going to be at war. There can be differences in technology visions or industry visions. So you have to look at the visions of both companies and if they are dramatically different, you should back away.

Second, you have to produce quick wins for your shareholders. If we did not produce a win with Crescendo in the first year, our shareholders would have been all over us. And if it is only short-term, then it is not strategic. Shareholders have to benefit from any acquisition.

Third, you have to have long-term wins for all four constituencies -- shareholders, employees, customers and business partners. I know that sounds corny, but it is true.

Finally, the chemistry has to be right, which is hard to define.

The fifth element -- for large mergers and acquisitions -- is geographic proximity. Geography is key. If you are doing a large acquisition, the minute you get on an airplane, you've got a problem. It is different if you are doing an engineering or technology acquisition, because those can be remote. But if you are combining two large companies and the center of manufacturing or marketing is in San Jose, Calif., and you are in Boston, what future do you have? It is very limited.

S&B: How disciplined are you in your approach to those five criteria? If they are not all in place, will you still buy a company if the technology is great or the people are very good?

JOHN CHAMBERS: No. We don't do it. We've killed nearly as many acquisitions as we've made. We killed acquisitions for those reasons even when they were very tempting. I believe it takes courage to walk away from a deal. It really does. You can get quite caught up in winning the acquisition and lose sight of what will make it successful. That's why we take such a disciplined approach.

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