Friday, September 21, 2007

Recent Acquisitions by CISCO Systems’’ Case Study

Anupam Dubey
Keerthi Shankar
Mainak Bhattacharya
Vinod Ramteke
K.V.S.S. Narayana Rao

Corporate history
• Founded in 1984 by Len Bosack and Sandy Lerner.
• While Cisco was not the first company to develop and sell a router (a device that forwards computer traffic between two or more networks), it was one of the first to sell commercially successful multi-protocol routers, to allow previously incompatible computers to communicate using different network protocols
• As the Internet Protocol (IP) has become a standard, the importance of multi-protocol routing as a function has declined.
• Today, Cisco's largest routers are marketed to route primarily IP packets and MPLS frames.
• Company went public in 1990, and was listed on the Nasdaq
• Acquired Cerent Corp., a start-up company located in Petaluma, California, for about $7 billion in 1999.
In late March 2000, at the height of the dot-com boom, Cisco was the most valuable company in the world, with a market capitalization of more than $500 billion. In 2007, with a market cap of about $165 billion, it is still one of the most valuable companies.
Using acquisitions, internal development, and partnering with other companies, Cisco has made inroads into many network equipment markets outside routing, including Ethernet switching, remote access, branch office routers, ATM networking, security, IP telephony, and others. In 2003, Cisco acquired Linksys, a popular manufacturer of computer networking hardware and positioned it as a leading brand for the home and end user networking market (SOHO).

Acquisitions by CISCO


Since it made its first acquisition in 1993, CISCO has acquired a total of 110 companies--an average of about one every six weeks for 13 years. Cisco's business, built largely through acquisition, is booming. The company's routers and switches--the two networking devices that keep the Internet humming by allowing computers to talk to one another--have captured more than 70 percent of the expanding $23 billion markets, according to Dell'Oro Group. Sixteen years after it went public, Cisco's market capitalization, at some $120 billion, is bigger than those of Dell, Xerox, and Apple combined.
Some of the Recent Acquisitions have been:
• May 22, BroadWare Technologies, provides software that enables web-based monitoring, management, recording and storage of audio and video that can be accessed anywhere by authorized users.
• March 28, SpansLogic, develops processors that improve packet processing speeds across the network.
• March 15, WebEx, makes applications that enable online group meetings and secure instant messaging.
• March 13, NeoPath, a provider of high-performance and highly scalable file storage management solutions.
• March 5, Utah Networks, acquired selected technology assets of Utah Networks, the operator of the social networking site
• February 21, Reactivity, XML gateway provider enabling customers to deploy, secures, and accelerates XML and web services.
• February 8, Five Across, software developer of 'social networking' technologies that allows businesses to create 'MySpace-like' communities on their websites.
• January 4, Ironport, a developer of security software that scans e-mail for viruses and spam.
• December 15, Tivella, a provider of digital signage software and systems.
• November 13, Greenfield Networks, developer of semiconductors designed to improve Ethernet packet processing for the so-called metro Ethernet market.
• October 25, Orative, developer of solutions that extend Cisco's Unified Communications system to mobile devices.
• October 10, Ashley Laurent (selected assets), provider of software for the embedded service provider gateway market; Cisco will use to improve Linksys' DSL gateway offerings.
• August 21, Arroyo Video Solutions, software designed to help cable operators and phone companies deliver a more flexible video-on-demand service.
• August 10, Nuova Systems, technologies for the data center. $50M funding commitment for an 80% ownership; will become a majority-owned subsidiary of Cisco.
• July 6, Meetinghouse, provides 802.1X-based security software that allows enterprise customers to restrict access to networked resources through both wired and wireless media.
• June 9, Audium, technologies that allow interactive voice response (IVR) systems to work together to power voice applications in an enterprise, carrier or service bureau environment.
• June 9, Metreos, software enabling rapid development and automated management of applications that converge voice with enterprise applications and data.
• March 7, SyPixx Networks, provides network-centric video surveillance software and hardware.
• November 29, Cybertrust (selected assets); a security intelligence information service, known as Intellishield Alert Manager.
• November 18, Scientific-Atlanta a digital cable television equipment manufacturer.
• September 30, Nemo Systems, a fabless semiconductor company that develops memory chips for network systems.
• July 26, Sheer Networks, intelligent network and service management products
• July 22, KISS Technology (by Linksys), technology provider for networked entertainment devices
• June 27, Netsift, high-speed packet processing solutions
• June 14, M.I. Secure Corporation, security and VPN solutions
• May 26, FineGround Networks, network appliances that accelerate, secure, and monitor application delivery
• May 23, Vihana, Semiconductor solutions
• April 27, Sipura Technology (by Linksys), Voice over IP specialist
• April 14, Topspin Communications, Server Fabric Switches
• January 12, Airespace, Wireless LAN solutions
• 1993 Crescendo Communications, $95 million: an entry into switches
• 1999 Monterey Networks, $517 million: a fiber-optics deal that fizzled
• 2003 Linksys, $550 million: a move into home networking
• 2005 Airespace, $450 million: a beachhead in wireless technology
• 2006 Scientific Atlanta, $7 billion: an attempt to pave the way for digital TV over the Internet

Acquisition Process:

Most of the Acquisitions in Cisco are handled by its business development group, a 40-person team in Cisco’s San Jose office complex.
The Cisco acquisition process was not always so seamless. For almost 10 years after it was founded in 1984, the company wasn't in the business of acquisitions at all. The market was growing rapidly, and Cisco went public in 1990. But three years later, when a faster and cheaper piece of hardware, the switch, seemed to threaten its business of routers, Cisco had to change its business model.

Acquisition No. 1: Crescendo Communications, a small switch maker that Cisco purchased in 1993 for $95million. The switching unit now generates almost $10 billion in annual revenues.
Cisco has used acquisition to expand into new markets and technologies. In 1995, Cisco acquired its way into firewalls and cache engines. In 1998, Internet telephony. In 2003, with the acquisition of Linksys, a home-networking company, Cisco made its first big move away from corporate customers into the consumer market. This year, by acquiring Scientific Atlanta, a set-top-box manufacturer, Cisco expanded its product line into the living room, as well, moving into video
In 2003, Cisco acquired Linksys, A small company based in Irvine, California. Linksys makes broadband routers for homes and small businesses--enabling fast, secure Internet access for multiple computers. Since Cisco has always targeted business customers, there was some skepticism within the company about entering the consumer market. But ultimately the logic of the deal won out: Linksys not only would give Cisco a foothold in the fast-growing home-networking market, but it would also help pump up infrastructure demand for routers and switches.

Synergies Claimed

To understand how remarkable Cisco’s success has been, it is only necessary to examine competitors such as Nortel, Ericsson, and Lucent that also were aggressive acquirers – all using their high stock market capitalizations to fund their acquisitiveness. By 2003, all of these firms with the exception of Cisco were recovering from near bankruptcy, and had written-off billions of dollars spent on acquisition. Moreover, start-up competitors such as Ciena, Juniper Networks, and Extreme Networks were experiencing great difficulties. Within this market maelstrom, Cisco stands out as the only networking equipment firm with solid finances and a continuing acquisition program

After experiencing some failures in acquiring companies, Cisco devised a three step process of acquisition.

1) Analyzing the benefits of acquiring, understanding how the two organizations will fit together – how the employees from the organization can match with Cisco culture and then the integration process. For example Cisco believes in an organizational culture which is risk taking and adventurous. If this is lacking in the working style of the target company, Cisco is not convinced about the acquisition.

2) No forced acquisitions are done - The Company insists on no layoffs and job security is guaranteed to all the employees of the acquired company. Once the acquisition team is convinced, an integration strategy is rolled out. A top level integration team visits the target company and gives clear cut information regarding Cisco and the future roles of the employees of the acquired firm.

3) After the acquisition, employees of the acquired firm are given 30 days orientation training to fit into the new organizational environment. The planned process of communication and integration has resulted in high rate of success in acquisitions for Cisco.

Cisco’s competitors such as Lucent and Nortel were certainly scanning their environment, but were nearly always late in entering new fields.
The decision to eschew the traditional R&D laboratory approach favored by its established competitors meant that Cisco had to develop another mechanism for providing future products. Cisco’s management learned that one of the best places to find the products of the future was in the start-up ecosystem from which it had emerged only a decade earlier. With this understanding, Cisco evolved a portfolio of tactics, formal and informal, to tap the knowledge that is constantly emerging in its ecosystem. Cisco created the Business Development Group (BDG) to be involved in the ecosystem.There were also informal practices that evolved inside Cisco. Because of the multiplex linkages and the embeddness in the ecosystem, Cisco
has early information about emerging technologies and significant new startups.
The emphasis on gathering environmental knowledge is formalized at the Business Unit
(BU). Each BU is charged with tracking and assessing new technologies that could affect its market. In the annual business plan each BU must identify emerging technologies and suggest a preliminary make-or-buy recommendation. This compels BU personnel to scan the environment for competitors and opportunities.
At the corporate staff level, the BDG has responsibility for ecosystem involvement, including venture capital investing, strategic alliances, and acquisitions. It operates as the central repository for information about the ecosystem. Through relationships with venture capitalists, Wall Street analysts, industry insiders, and its own venture investments, the BD team keeps track of private firms and emerging markets. The BDG’s investments in startups are important because 25 percent of all acquisitions have been portfolio firms; however Cisco invests in many firms it does not purchase. For example, in 1993 Cisco made a $2.7 million early round investment in Cascade Communications, but in 1997 Ascend Communications, a Cisco competitor purchased Cascade.

Recent Acquisitions (2007)- Utilization of Synergies.

Reactivity, Inc.
February 21, 2007 - Reactivity is a leading XML (extensible Markup Language) gateway provider for organizations ranging from commercial enterprises to the Global 500. The acquisition demonstrates Cisco's commitment to the expanding Application Networking Services (ANS) Advanced Technology segment, which is an important part of Cisco's Service-Oriented delivered from the network platform. Reactivity complements and extends the capability of Cisco's ANS portfolio for these emerging application architectures.

Market Opportunity: Application Networking Service

BroadWare Technologies, Inc.
May 21, 2007 - BroadWare Technologies is a leading provider of IP-based video surveillance software. BroadWare's software enables web-based monitoring, management, recording and storage of audio and video that can be accessed anywhere by authorized users. With this acquisition, Cisco will be able to help customers easily gain access to live and recorded surveillance video for faster investigation response and event resolution. The BroadWare acquisition complements Cisco's existing video surveillance product offering, which provides a smooth migration path from analog surveillance video to a digital network solution.

Market Opportunity: Physical Security

SpansLogic, Inc.
March 28, 2007 - SpansLogic is a leading provider of processors that dramatically improve packet processing speeds across the network. SpansLogic offers a breakthrough approach for resolving packet processing bottlenecks at extremely high speeds. The SpansLogic acquisition will provide Cisco with valuable technology, IP, and a core team to productize innovations that support Cisco’s SONA architecture.
Market Opportunity: Silicon

WebEx Communications, Inc.
March 15, 2007 - WebEx is a market leader in on-demand collaboration applications, and its network-based solution for delivering business-to-business collaboration extends Cisco's vision for Unified Communications, particularly within the Small to Medium Business (SMB) segment. WebEx's service portfolio includes technologies and services that allow companies to engage in real-time and asynchronous data conferences over the Internet as well as share web-based documents and workspaces that help improve productivity, performance and efficiency of workers in any size organization. WebEx's subscription-based services strategy has been key to its success, and Cisco plans to preserve this business model going forward.

Market Opportunity: Unified Communications

NeoPath Networks
March 13, 2007 - NeoPath Networks is the leading provider of high-performance and highly scalable file storage management solutions. Cisco and NeoPath share a common vision of providing unique and flexible file storage management services to enterprise customers. In line with its Service-Oriented Network Architecture (SONA) strategy and vision, Cisco plans to integrate the NeoPath technology in future products with the goal of providing additional value added file services. This will benefit both current file based solutions, such as Wide Area Application Services (WAAS), and business partners’ file based solutions.

Market Opportunity: Storage

FiveAcross, Inc.
February 8, 2007 - Five Across is a leading vendor in the social networking marketplace. The Five Across platform, Connect Community Builder, empowers companies to easily augment their websites with full-featured communities and user-generated content such as audio/video/photo sharing, blogs, podcasts, and profiles. These user-interaction functions help companies improve the interaction with their customers and overall customer experience on their websites. Social networking functions are of unique interest to media companies, sports leagues, affinity groups and any organization wishing to increase its interaction with its online constituency.

Market Opportunity: Consumer

IronPort Systems, Inc.
January 4, 2007 - IronPort is a leading provider of messaging security appliances, focusing on enterprise spam and spy ware protection. Securing email, messaging and other sorts of content is of primary concern to enterprises and other organizations. As email and messaging are leading applications for use over the Internet, the acquisition of IronPort's industry-leading messaging and Web security solutions is a natural extension to Cisco's security portfolio. The security products and technology from IronPort add a rich and complementary suite of messaging solutions to Cisco's industry-leading threat mitigation, confidential communications, policy control, and management solutions.

Market Opportunity: Security

Steps Subsequent to the announcements of the Deals
(1) Hands-on directors. Cisco has made over 70 acquisitions to date and its executive owner has been actively involved in every one.
(2) Setting goals. A crucial part of Cisco’s merger activity is exploring how its vision and that of an acquired company can complement each other.
(3) Combining cultures. Cisco uses a mentoring system where a Cisco veteran supports an acquired manager. This is a painless way of transferring Cisco’s values to the acquired company, as the acquired manager will trickle them down to his own staff. Cisco also holds regular employee orientation sessions where questions can be asked and answered.
(4) Maximum involvement. Cisco involves leaders of all the relevant business units to promote ownership of the merger strategy.
(5) Communication. One of Cisco’s integration principles is “communication early, often, and honestly”. This avoids the atmosphere of rumor and suspicion that can build up around a fundamental business change like a merger. Cisco’s communication strategy is to share the new post-merger business vision with employees as soon as possible with particular emphasis on timescales, future benefits and ongoing progress.
(6) Clarity. Cisco lets employees know their roles and titles as soon as a merger is announced.
(7) Customer focus. Cisco rolls out information to customers at the earliest practical stage and makes customer satisfaction a key measure of successful integration.
(8) Flexibility. Cisco is also keen to allow acquired companies to retain their unique identities when appropriate.
Steps Prior to Deal Announcement
When the agreement is imminent, typically 6-8 weeks prior to the announcement, integration preparations commence. Two dedicated BDG units, Merger and Acquisition and Acquisition Integration, which in total employ approximately 60 persons, facilitate this. Their purpose is to oversee the process. They are responsible for ensuring that Cisco employees interact directly and frequently with the target firm employees to create a shared understanding and trust. The integration manager (from the BD group) forms a team including public relations, sales, HR, and marketing personnel from both the BU and the target company.
There is also a gradual evolution in responsibility for the acquisition. Initially, the BD manager and executive sponsor share equal responsibility, but as the integration process advances the BD manager transfers responsibility to the executive sponsor.
The Announcement and Closing Period
With the announcement, employees at both firms and the public are informed about the acquisition. The announcement does not mean that the acquisition is completed. The finalization of the acquisition will take 90 days or longer. However, for the employees of the acquired firm, they must be informed about its meaning to them immediately. Therefore, though senior managers have known about the acquisition, now the other employees are informed about the implications for them. Immediately after the announcement, HR conducts communication meetings at the acquired firm until all employees have information on key issues.
The announcement is a critical moment, because it is at this time that employees experience the maximum uncertainty. The prior discussions, the clear plan, and the professionalism of the acquisition team dampen the apprehension that plagues most acquisitions. This is reinforced by the fact that the leaders of the acquired firm already know their positions and responsibilities within Cisco, and thus are able to reassure their employees. Prior planning avoids a prolonged period of uncertainty and chaos that could retard progress and devalue the acquisition.

First 90 Days after Closing
After the deal closes, the business integration team takes over the majority of post-announcement integration responsibilities. The plans that the BD team developed are executed. The HR systems are converted, integration of the acquired company’s network and conversion of voice and data systems is undertaken, and the sales, service, and marketing strategies and manufacturing plans are put into effect. F
90 to 180 Days
The BD integration team continues to operate until all plan parameters are met, including, in most cases, shipment of the acquired company’s products under the Cisco name through the Cisco sales channels By the end of 180 days, the team reevaluates and refines 6, 12, and 24-month initiatives. Also, the planned and actual results are measured and the reasons for discrepancies are investigated.

Structuring of the Deals

As the table below indicates, the acquisitions are concentrated in a few locales. Forty-four percent of all acquired firms were located in Northern California. Moreover, the percentage of Northern California acquisitions was highest in the early years when Cisco was learning how to acquire (69 percent from 1993 to 1996 and only 37 percent during 1999 and 2000). Interestingly, after the stock market bubble collapse from 2001 to 2003, of Cisco’s ten acquisitions 50 percent were in Silicon Valley and the remaining five were in Texas (2), Massachusetts (2), and Southern California (1). The second largest concentration (14%) was in the Boston area, which has the second largest concentration of venture capital-financed, high technology startups in the U.S. and an entrepreneurial environment. The final significant concentration was Israel, which has a start-up culture resembling that of Silicon Valley

Table to be inserted

Valuation Details:

Cisco Systems, Inc. and many high-tech companies used pooling of interest method to account for acquisitions of both big well-established and small low-revenue start-up companies. By taking advantage of pooling, Cisco avoided recognizing goodwill and subsequent amortization, which, they believe, would have otherwise depressed its earnings and penalized its market value for years to come.
Cisco has used its own stock to make acquisitions valued at more than $30 billion.
The high prices which Cisco pays for other companies “validate” the prices of its previous takeovers and its own sky-high price (currently no less than 190 times earnings).

The majority of Cisco's acquisitions are funded with its stock. However, there are times that cash or a combination of stock and cash is used. The way in which the purchase is funded depends on the objectives of Cisco and the target company and is impacted by such issues as the tax treatment of the transaction and liquidity. The exact way in which acquisitions are funded is part of the negotiating process.

When Cisco uses its stock to fund an acquisition, there's some dilution of stock ownership, which results in lower earnings per share and cash flow per share. Cisco is richly valued and on many occasions the company it acquires actually trades at lower multiples than Cisco. Also, a number of Cisco's acquisitions have made significant contributions to its explosive growth

Subsequent Performance:

Since its inception Cisco has faced two sets of rivals: start-up firms such as 3Com, Wellfleet, Synoptics etc. and established telecommunications equipment makers such as Lucent, Nortel, and Alcatel. Of the four major data communications rivals established in the 1980s, 3Com, Wellfleet, Ascend, and Synoptics, only 3Com remains independent, but its market capitalization in December 2003 was less than $3 billion versus $160 billion for Cisco. Nortel's value had declined to approximately $20 billion. These are powerful general indicators of success, and since acquisition was a central component of Cisco’s total corporate strategy, they indirectly confirm the strategy's success.
In the aftermath of the crash of the stock market bubble, these other firms have discontinued their acquisitive strategy, while Cisco continues to acquire firms, though at a much slower rate. The continuation of the strategy is an indication that it was not driven so much by high stock valuations as by corporate strategy.
Given Cisco's approximately 60 percent profit margins, market share growth in rapidly growing markets results in enormous returns and can justify high acquisition prices.
The amount invested and market share in each market category is shown in Figure below (Data till 2001)

fig to be inserted

Advice to the Buyer and Seller

Cisco transformed what the literature “environmental scanning” into a process of active engagement in the ecosystem. This implies that management must manage not only the internal organization, but also its interaction with external organizations. Cisco now depends upon the ecosystem to create innovations and propel the technology forward. In other words, entrepreneurial activity is expected to benefit Cisco because it has developed methodologies for harnessing it. The entire firm is mobilized to collect information from the ecosystem through an involvement in it. This is critical for a data communications equipment firm that has no central R&D laboratory – the ecosystem is the substitute.
The reliance upon acquisition as a methodology for entering markets means that successful integration is a critical component for overall corporate success. The importance Cisco places on dialogue in facilitating the acquisition and integration process is noteworthy. Cisco values unmediated access to the firm’s decision-makers so it rarely uses intermediaries such as investment bankers and consultants.




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