The Wall Street Journal -- October 13, 1999
Cisco Systems' Chief Executive Tells
Why Firm Is in Such a Buying Mood
GENEVA -- Cisco Systems Inc. is on a buying binge -- but how does it decide exactly what to buy, and how to make it work?
That is the question that John Chambers, chief executive of the San Jose, Calif., Internet-equipment maker is wrestling with. In August, Cisco announced its 40th acquisition, of U.S.-based Cerent Corp., for $6.9 billion in stock. In the next year, Mr. Chambers says, he expects to snap up 20 to 30 more companies.
In Europe, where Cisco's growth tops 50%, the company has bought two companies in the past year. Given Europe's strength in mobile phones, Mr. Chambers regards the region as a good hunting ground for companies with wireless technology.
How does he pick his acquisition targets, and how does he ensure they pay off in the long run? That was the topic of an interview here at Telecom 99, a big industry trade show, with Wall Street Journal Europe reporters Stephanie Gruner and William Boston.
Mr. Chambers: We made our first acquisition six years ago. We paid $92 million for Crescendo [Communications Inc.] -- a company that had only $10 million in revenue. . . . At that time we said most acquisitions would fail. And we felt if we're going to be successful, you aren't going to be smarter or work harder, you're going to have to do it differently.
If you want to know how an acquisition is working, people will say: "Tell me the revenue." Well, that's true. If you acquire something and you've got a big company, you should really grow the revenue dramatically in the first year. So if you don't gain market share the first year, that's a real warning signal.
[But] in my industry when you pay between $500,000 and over $10 million per employee, as in [Cerent], all you're doing is acquiring people. So if you want to know how you really did, the question is: "How many people are still with you two years later?" It will shock you that 40% to 80% of the top executives and the top engineers are gone after an acquisition within two years. Our attrition rate is 6% total, about 4% voluntary, per year, with our acquired companies. When you pay the price that we pay for these companies that we acquire, if all you got were current market share and current products, you made a terrible decision for your shareholders.
WSJE: How does that affect the due-diligence process?
Mr. Chambers: We walk in the door and first thing we do is really understand their vision and their strategy, what role they want to play. Is it parallel to where we're going? If it overlaps too much you have some conflict. But if it's going the opposite way you have a real problem.
The second thing we look at is similarity of cultures and chemistry. If I walk into a president's office and it's this big area in the corner office, etc., that's a real warning signal. We look at how the stock options are spread among the employees. In my office it's 12-by-12. We're a very frugal company. Employees have the open area around the management; management's in the middle. The same office size for all of us. We give 42% of our stock options to individual contributors.
WSJE: Europe is going to pose some obvious culture problems in terms of acquisitions. Have you come across any yet? Are there different things you look for?
Mr. Chambers: There is a cartoon from years ago about one dog on the Internet talking to another dog on the Internet saying, "On the Internet, nobody knows you're a dog." On the Internet, they don't care what sex you are. What age you are, what race you are, who your parents are. If you're good over the Internet, we love you. It doesn't matter where you are in the world. If you have the right Internet skills, we're going to love you.
[But] you have got to have a similar cultural background. And by culture I'm not talking about the French culture vs. the German vs. the American vs. the Italian vs. the Australian vs. the Chinese. It's: Do you have a common focus on the customer? Do you have a common focus on sharing things and working together? Are you driven by leading-edge technology?
Are they customer focused? Do they share things among their group? Would it match our culture?
When I look for an acquisition candidate, I look for who's the best in the world. If I had my rathers, I'd rather they be right there in San Jose, because that's a lot easier to incorporate in. If I'm acquiring 40 to 100 engineers with a little small sales force that hasn't gotten the overhead structure of a large company yet, it doesn't matter to me where they are in the world. It could be Israel, it could be Poland, the U.K., it could be Australia, etc. So I go after the best candiate who is our cultural match and that we can hold the people.
WSJE: What companies in Europe are you interested in?
Mr. Chambers: Well, remember, I would never acquire issues that compete with the customers I've got to have later on. So I don't compete against my customers, and I don't compete against the partnerships I've got to have to win. So I'm pretty predictable in that area. So you won't see me acquiring a customer segment like a service provider. What you will see me acquiring is technology that allows us to play in the service-provider enterprise small to medium business. So the acquisitions we're interested in are in data-voice-video integration. We're after companies over here that can apply the technology world-wide. . . . So again we're just looking for the best fit in a market where for whatever reason, we were not able to build it ourselves.
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