In 1993, the router company Cisco Systems Inc was pitching for a big order from Boeing, the aircraft builder, when the buyers turned round and issued an unexpected ultimatum to chief executive John Chambers: They said to me bluntly ‘You are not going to get this order unless you buy this company.’ That company was Crescendo, a supplier of local area network switch equipment, a low cost and less functional alternative to the routers Cisco was offering and on which it had built its business. For Cisco it was a defining moment. A day before, Ford Motor Company had also told Cisco that it was going to go with the new fast Ethernet local area networking switching technology, in which Crescendo specialized. Crescendo was a small company – it had sales of just $10m – and neither Ford nor Boeing wanted to risk giving it an order of such magnitude. At the time, Cisco’s management was pondering a dramatic move – a move into low end LAN equipment through the acquisition of established hub makers Synoptics or Cabletron. This would have cost the company some $500m. Chambers, the chairman John Morgridge, and the chief technology officer Ed Kozel decided they not only had to listen to their customers, but that a strategy based on buying small technology companies made more sense than buying bigger, more established ones. In this way, the acquisition & development (A&D) strategy, which has become an established part of Cisco business, was born. Cisco purchased Crescendo for $10m, and began to transform from a router company to a full line network equipment supplier with ambitions to become the Intel of the internet. Cisco has now turned A & D into a business process, a means of providing it with expertise and technology without having to carry out expensive and possibly unproductive research. We will invest 11% or 12% in research and development this year (about $900m), says chief finance officer Larry Carter. But that isn’t enough, that’s why we need A & D. The $900m is really all D. We don’t do any research here per se. In the past three and half fiscal years, Cisco has bought 22 companies, among them Lightstream (ATM switches, $120m), Grand Junction (switches, $348m), Granite (gigabit Ethernet, $220m) and Stratacom (enterprise switches, $4bn). And just last week Cisco added two more companies to its portfolio – digital subscriber line company NetSpeed Inc for $236m and multicast video streaming company Precept Software Inc for $84m. These companies’ products – and those derived from them – now account for some 30% of Cisco’s annual $8bn revenue. But in spite of its success, the importance to Cisco of A & D may be diminishing. According to Volpi, acquiring a company is now a fourth choice strategy – after internal development, joint development with a partner, and joint marketing with a partner. Clearly partnering is the next phase, says Farrokh Billimoria of investment company Hambrecht & Quist. Chambers agrees. Why? Because with the technology maturing, and service, support and branding becoming more important, Cisco is seeking to leverage the channels, technologies and branding of big partners. The company is in the process of a putting together up to ten big partnership agreements with giants such as Intel, Microsoft and Hewlett-Packard. These partnerships, insists Chambers, are not just alliances, but marriages that will tie the companies together over the long term, to the substantial benefit of both parties. Is he sure Microsoft will not turn on Cisco and attempt to take its business? Reasonably comfortable, he says. But he cautions: Partnerships make acquisitions look easy. Almost all partnerships fail.
Computer Business Review
