TIMOTHY ARCHIBALD FOR USN&WR
Ned Hooper (left) and Dan Scheinman are pivotal players in Cisco's mergers-and-acquisitions operation.
Posted Sunday, June 18, 2006
SAN JOSE, CALIF.--Ned Hooper uses one word to describe corporate acquisition. "It's traumatic--always," says the vice president of business development at Cisco Systems, whose former company was acquired by the tech giant in 1998. "No matter how successful you've been and how much you make on the deal," he says, "it's traumatic because there's change coming."
Best case, after all, acquisition means a new job, a new office, new responsibilities, and a new boss. Worst case, it can mean a career-ending pink slip. For Hooper, it meant moving 3,000 miles, from Herndon, Va., where he was a product manager for LightSpeed, a maker of voice-signaling technology, to Cisco's headquarters here. And while he ended up getting promoted rapidly--working first in sales and marketing, then in mergers and acquisitions, a group he has been running since 2004--it still took him time to adjust. "It takes a good year," he says, "for people coming in through acquisition to get integrated mentally and emotionally."
That is, if they stick around. According to most estimates, about 70 percent of mergers and acquisitions fail to live up to expectations. Layoffs are common, culture clashes are the norm, and workers often abandon ship. One study found that in the first five years after a merger, companies typically lose about 10 percent of their value. "The majority of acquisitions," says Jeff Dyer, a professor of strategy at Brigham Young University's Marriott School of Management, "really don't pan out."
But there are acquisitions, and then there are acquisitions. And Hooper, when his company was acquired by Cisco Systems, may have been one of the lucky ones. Cisco is one of the few companies that have found a way to succeed in this risky business. Since it made its first acquisition in 1993, the world's No. 1 maker of computer networking equipment has gobbled up a total of 110 companies--an average of about one every six weeks for 13 years. It has had its fair share of flubs and failures, of course, but since 2002, more than 90 percent of the workers acquired by Cisco have stayed with the company. 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.
How has Cisco succeeded where so many others have failed? Simply put, experts say, it has professionalized a process that other companies turn to only on occasion--usually out of either greed or necessity. "My experience with most companies is that they do acquisitions infrequently and integration is somebody's nighttime job," says Brett Galloway, the former CEO of Airespace, a wireless networking company Cisco acquired last year. "Cisco has people who do this full time--it's a core function of the company."
The nucleus of the company's acquisitions machine is its business development group, a 40-person team tucked into a nondescript cubicle farm in Cisco's sprawling San Jose office complex. The BD group, as it's called, has a diverse staff, ranging from Ph.D.'s in engineering to experts in silicon chips to M.B.A.'s with investment banking experience. Together, they identify potential buys, conduct due diligence on target companies, negotiate with senior execs, and integrate new companies into the greater Cisco whole. (The company now has more than 48,000 employees.) For over a decade, the group has operated under the same set of basic principles: Buy small, buy early in the product's life cycle (that is, preferably before it becomes the next big hit), and, most important, put the people you're acquiring above everything else. "At the end of the day, it's always an art, not a science," says Dan Scheinman, the senior vice president for corporate development, who has overseen the group since 2001--and who reports directly to Chairman and CEO John Chambers. "People have to like each other and trust each other."