Thursday, October 30, 2008

Cisco Changes Tack
In Takeover Game

WSJ, April 17, 2008; Page A1

One of the critical components to growing beyond your current Business Design is how best to build the “Capability Platform” required for success. Do you build the capabilities internally or do you buy them? This is an interesting article on how Cisco is facing this challenge as its growth slowed from its heyday and how it is altering its acquisition strategy going forward.

When Scott Weiss heard that tech behemoth Cisco Systems Inc. wanted to acquire an email-security company like his startup, he emailed a vow to his staff: "Said acquiree will not be us."

Cisco was famous for fueling its stellar growth by buying dozens of companies and digesting them completely, installing its own executives and leaving little trace of a target's identity. The method made Cisco the envy of the technology world, where so many acquisitions go awry. Mr. Weiss feared losing control of the firm he co-founded, IronPort Systems Inc. When Cisco made an offer in early 2006, he declined.

Then last year, Mr. Weiss agreed to sell, for $830 million. His convictions hadn't shifted. Cisco's had.

The Silicon Valley icon has been remaking its acquisition strategy as it carefully tries to move into the 21st century's hot tech markets. The company ultimately offered Mr. Weiss an un-Cisco-like proposition: Cisco would buy IronPort, but let it operate as a stand-alone unit, with its own managers, brand name, engineers and salespeople.

"They wanted to make sure they didn't screw it up," says Mr. Weiss. This month, Cisco promoted Mr. Weiss, 42 years old, to head all of its security-technology business.
Cisco's new focus mirrors the efforts of other large technology firms -- including Microsoft Corp., Oracle Corp. and Sun Microsystems Inc. -- to avoid losing their status in a new tech era in which growth is led by products powered by the Internet. Cisco's once-torrid quarterly growth has slowed to around 15% year-to-year, from between 30% and 40% or more early this decade.
Cisco's strategy shift is particularly striking because the company, the country's third-largest tech firm by market capitalization, is viewed as a bellwether for the industry. Chief executive John Chambers wants the networking giant to move beyond its core business -- making gearlike switches and routers that direct computer and telecom traffic over corporate networks. It's entering entirely new markets, such as online video and Web conferencing. (Changing the Business Design)

That means adding new pages to Cisco's much-admired acquisition playbook, which has been the subject of Harvard Business School studies. "We can't buy a company and tell it to do as we see fit if we don't have a true understanding of the marketplace," (critical!!!!) says Ned Hooper, Cisco's head of business development, who is leading the new acquisition and integration strategy.

Buying innovative small firms rather than developing new tech from scratch has long helped Cisco stay in front of the pack with a fresh stream of new products, while largely sidestepping the merger messes that peers often faced. (their strategy to build the Capability Platform) The San Jose, Calif., company has gobbled up 126 companies since its first acquisition in 1993, most of them small, privately held and closely related to its networking-equipment business.

'Platform' Deals

But in the past five years, while spending about $2.5 billion on 44 companies in its core business, Cisco has spent more than four times as much -- $11 billion -- on a handful of new-style acquisitions that it calls "platform" deals. (dramatic investment for the future -- the balance of protecting and growing what you have vs. driving new ground is very aggressive) Instead of its typical two months to integrate companies, Cisco plans to take 18 months to two years on more-unfamiliar businesses.

Cisco has long followed a strict guideline for buying other companies, targeting small businesses that establish early market leadership but are inexperienced in getting their wares to customers. Cisco has nearly six dozen full-time staffers dedicated to shepherding newcomers into the company. They make sure that within two months, newly acquired employees get a new Cisco boss, a Cisco bonus plan and a Cisco health plan. Salespeople are either laid off or folded into Cisco's own massive sales organization, while top managers are offered two-year retention contracts to help ease the transition. Acquired companies typically lose their brand names.

Cisco began experimenting with a new approach in 2003, when it shelled out $500 million to acquire Linksys Group Inc., which makes home-networking equipment that allows multiple personal computers to share files and an Internet connection.

At the time, the most sophisticated Cisco networking gear cost more than $100,000, while Linksys's consumer products started at less than $100. Linksys also sold its products through retailers, with which Cisco had little experience. To avoid inadvertently damaging the newly acquired company, Cisco has kept in place the Linksys brand name, Linksys manufacturing agreements and its sales team. (really important)

Cisco used the same hands-off method when it bought set-top box manufacturer Scientific-Atlanta Inc. in 2006 for $6.9 billion. While most of Cisco's acquirees are within 20 miles of its Silicon Valley headquarters and have fewer than 300 employees, Scientific-Atlanta was based in Lawrenceville, Ga., and had 7,600 employees.

To deal with the distance and size of the acquisition, Cisco tossed out its playbook, which called for a single executive to manage the process. Instead, it parceled out different units and departments among a tiny platoon of Cisco managers.

Last year, Cisco snapped up a 2,200-person online conferencing start-up, WebEx Communications Inc., for $3.2 billion. Cisco allowed WebEx to keep its Santa Clara, Calif., headquarters and left in place WebEx's sales team.

Market Leader

There are signs the new tack is working. Scientific-Atlanta contributed $2.76 billion, or about 8%, to Cisco's 2007 revenue of $34.9 billion. The company doesn't break out numbers for its Linksys or WebEx divisions, but Linksys remains a market leader with a strong brand.

To be sure, as Cisco seeks farther-flung businesses, the company faces the possibility of falling into integration morasses it had dodged. The slow pacing for some of the "platform" integrations suggests they're not as easy. Cisco decided to take a year and a half learning Scientific-Atlanta's business before sitting down with its executives to discuss detailed sales synergies. Mr. Chambers last year said publicly that he would phase out the Linksys name, but later recanted, saying Cisco's name hadn't made enough inroads with consumers.

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