Cisco's Connections

Quick work. When they do, a Cisco acquisition can be something to behold. In 1999, when Cisco acquired Cerent Corp., a maker of optical networking gear, discussions between the two companies lasted only 2 1/ ₂ hours over three days before the $6.9 billion deal was signed. On the morning that Cisco took over the company, employees arrived at work to discover they already had new titles, business cards, bosses, bonus plans, and health plans, plus access to Cisco's computer system. Only four of the 400 employees left the company in the first six months. "What we've found is that if you delay it, it's more painful," says Hooper. "We structure our acquisitions to retain people through the traumatic period--the adjustment period--and then they can look at Cisco with a more rational view." When it comes to turning acquired employees into Cisco employees, says Michael Howard, principal analyst at Infonetics Research, a data-networking consulting firm, "it's hard to name a better-run company in the world."

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: It sold routers and only routers. 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, Cisco engineers scrambled to start production of their own version. Soon, though, executives realized their product was going to be late to market. Cisco needed a switch that worked--and fast.

Enter acquisition No. 1: Crescendo Communications, a small switch maker that Cisco purchased in 1993 for $95million. Though Cisco's engineers grumbled that they could have produced their own switch in time, the deal worked. Cisco got into the market ahead of the competition, most of Crescendo's executives stayed with the company, and switches became a core Cisco business. The switching unit now generates almost $10 billion in annual revenues.

What began as a one-time event soon evolved into a long-term strategy--and is now an essential part of Cisco culture. While most big tech companies rely heavily on R&D to create products and business lines, Cisco, after Crescendo, decided to go another way. "It's the A&D approach to growth--acquisition and development," says Charles O'Reilly, a Stanford business professor who wrote a case study on Cisco in the '90s. Again and again, to move into new markets or to reinforce old ones with new technology, Cisco has used acquisition to expand its reach: 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.

Throughout this shopping spree, the Cisco business development group has maintained its discipline. "They do very few wild and woolly acquisitions," says Martin Kenney, a business-strategy expert at the University of California-Davis. "Everything they do is strategic." Cisco has never succumbed to the temptation of the big, flashy deal. A handful of its acquisitions have climbed into the $7 billion range, but the company has never even considered a merger on the scale of AOL-TimeWarner or Hewlett-Packard-Compaq. Instead, the vast majority of its acquisitions have been targeted technology buys--small start-ups with 50 or so engineers that are often referred to in-house as the "Cisco kids"--whose products link back to its core competencies, routers and switches.