S&B: You've acquired 14 companies already with a stated goal of another 10 to 12 in 1997. Is there a single thread that weaves through your strategy?
JOHN CHAMBERS: The first thing is you make a decision about what role you want to play in the industry and then what role you can play. Those are two separate issues. Once you do that, you have to say, what do you have to do to achieve your goal? And you can't get off track on that. One part is to do mergers and acquisitions. So you've got to build a culture that accepts that.
As simple as it sounds, it's like marriage. If you are selecting a partner for life, your ability to select that partner after one date isn't very good. Lots of people in the financial press say once Cisco does an acquisition it is a matter of management execution as to whether the acquisition works or not.
I argue with that. I think the most important decision in your acquisition is your selection process. If you select right, with the criteria we set, your probabilities of success are extremely high. It's tough enough to make a marriage work. If you don't spend a fair amount of time on the evaluation of what are the key ingredients for that, your probability of having a successful marriage after one date is pretty small. We spend a lot of time on the upfront.
S&B: At $4.5 billion, StrataCom was the largest acquisition you have made so far. Do you think you could absorb anything bigger?
JOHN CHAMBERS: Our ideal acquisition is a small startup that has a great technology product on the drawing board that is going to come out 6 to 12 months from now. When we do that, we are buying the engineers and the next-generation product. Then we blow the product through our distribution channels and leverage our manufacturing and financial strengths. However, we would not rule out larger acquisitions if the industry changes faster than we expected or where there is more of an integration than we expected.
Do we have anything larger in mind at the present? No. Our more typical acquisitions will continue to be smaller engineering organizations. We will continue to go after private companies. You can acquire them much quicker and with far fewer legal nightmares. There is also a lot less risk in those types of deals.
S&B: Is there something in your model that is unique to high-tech industries?
JOHN CHAMBERS: I think so. As I mentioned, we are in the business of acquiring people. That is different from the automotive or financial industries, where you are acquiring process, customer base and distribution. So when we acquire something, we are not acquiring distribution capabilities or manufacturing expertise. We -- Cisco -- are very good at that. We are acquiring technology. In this business, if you are acquiring technology, you are acquiring people.
That is the reason large companies that have acquired technology companies have failed. If you look at AT&T and NCR, or I.B.M. with ROLM, the acquirer did not understand that it was acquiring people and a culture. If you don't have a culture that quickly embraces the new acquisition, if you are not careful in the selection process, then the odds are high that your acquisition will fail.
Two years ago, we used to worry about what would happen if an I.B.M., H.P., AT&T or other large company acquired one of our key competitors. But the odds are very high that it would have failed. The reason it would have failed is that the culture required to make a company like Cisco or 3Com or Crescendo successful is not the same as the culture that is needed to make I.B.M. or AT&T successful.