Over the past three years Cisco Systems, a networking-hardware behemoth based in San Jose, Calif., has acquired 14 growth companies. It's certainly not surprising to see such corporate consolidation follow the recent spate of high-tech initial public offerings. What is interesting, though, is that the $4-billion company has figured out a way to make so many acquisitions so successful.
"It's become something of a science here," says Cisco's Charles Giancarlo, who sold his own company, Kalpana, an Ethernet pioneer, to Cisco in 1994 and now, as vice-president of business development, manages Cisco's mergers-and-acquisitions activities. "We've become pretty skilled at selecting and integrating new talent into Cisco."
"This market is moving much too fast for a stand-alone strategy," says Howard Charney, explaining why he recently agreed to make the company he founded in February 1992 the latest Cisco acquisition. He sold Grand Junction Networks for 5 million shares of Cisco stock and joined Cisco as a vice-president. "It helped that they sent someone to talk to me who was brought into the company under similar circumstances," explains Charney, who also cofounded 3Com, before he started Grand Junction. He had been planning to take Grand Junction public before the Cisco acquisition; in fact, Cisco approached him just days after his investment banker put Grand Junction's probable post-IPO market value in the $300-million-to-$350-million range. After five frantic weeks, the negotiations culminated in an agreement to purchase Grand Junction at a price close to the IPO estimate.
Giancarlo says Cisco's premerger investigations aren't limited to normal due-diligence concerns like stuffed marketing channels, balance-sheet sleight of hand, or purchased market share. "When you are buying a company for 5 to 10 times earnings," Giancarlo notes, "it's obviously not for today's products. That means keeping the people in place who can create that growth."
One certain deal-killer: golden parachutes. "We won't do a deal if the candidate company has accelerated vesting" for employees that kicks in once a company is sold, says Giancarlo. If a start-up is structured with accelerated-vesting provisions, "the minute you buy the company, they all get rich," he says. "We prefer golden handcuffs," which are applied with two-year noncompete agreements with key executives and technical personnel at the target companies, and the provision of Cisco stock options that vest over time.
Charney admits he misses the control he enjoyed before the acquisition. "What they've given me instead is the chance to kick our products through the roof," he says. Since the acquisition, sales of products derived from Grand Junction's former product line, which Charney manages, have mushroomed by a factor of eight, propelled by Cisco's global marketing.
Cisco's soaring stock price also helps keep new recruits engaged. Overall, the attrition rate for employees brought into the company through mergers and acquisitions is actually lower than the already-low single-digit rate for Cisco's regular hires. And 9 of the 14 CEOs whose companies were recently acquired are still at Cisco.
"What I really love about this place is the contest of ideas," says Charney. "Because we have people from different companies, there are different approaches to solving problems. That creates an atmosphere of excitement that even the best small company can't duplicate."
CISCO SYSTEMS, Howard Charney and Charles Giancarlo, 170 W. Tasman Dr., Building H-2, San Jose, CA 95134; 408-526-4000