Cisco's Connections

The company still does strike out occasionally. Cisco execs are open about the fact that their push into fiber optics in the late '90s hasn't worked out. The company's stated goals are to be first or second in any market it moves into, but Cisco's handful of acquisitions have managed to capture only about 7 percent of the optics market, according to Dell'Oro Group. Monterey Networks, most notably, an optical-routing start-up that cost Cisco $517 million in 1999, flamed out disastrously. The company's three founders left within days of the acquisition, and Cisco shut down its business after a year and a half, never having even tested its product. In the bubble, "we were in a situation where the premium was on speed," says Scheinman. "The longer we waited, the more expensive something got." As a result, he says, "we were forced to acquire earlier than we wanted to."

The Linksys logic. Lesson learned, though, he says. Cisco returned to form with its 2003 acquisition of Linksys, which has won high praise for masterfully working both sides of the networking market at the same time. A small company based in Irvine, Calif., Linksys makes broadband routers for homes and small businesses--enabling fast, secure Internet access for multiple computers. Since Cisco has always targeted business customers, there was some skepticism within the company about entering the consumer market. But ultimately the logic of the deal won out: Linksys not only would give Cisco a foothold in the fast-growing home-networking market, but it would also help pump up infrastructure demand for routers and switches. There was some risk, of course, but Cisco's networking girth diminished it. "Obviously when you play roulette, you're betting against the house," says Matt Robison,a communications technology analyst at Ferris, Baker Watts. But with Cisco's market share in routers and switches, he says, "they kind of are the house." After six months of negotiations, Cisco bought Linksys for $550 million. The routing company now brings in about $900 million annually in revenue.

As successful as Cisco has been in identifying hot new technologies and taking calculated risks in new markets, experts say, the true strength of its mergers-and-acquisitions operation lies elsewhere. Indeed, if there is a secret to Cisco's success, it is this: Cisco has come to realize that the acquisition of technology really isn't just about technology. "For us," says Hooper, "the people are the most strategic asset." If, after the acquisition, Cisco loses the technologists and product managers who created, say, the Linksys router, then it has lost the second and third generations of the product that existed only in those employees' heads. That, says Hooper, is where the billion-dollar markets lie. And that is where Cisco's acquisitions are aimed. "We need the expertise," he says. "We need the people."

Finding and keeping the right people, though, is a lot more difficult than finding a hot new technology." In the classic M&A world, if you can't metric it, don't trust it," says Scheinman. But that's not how Cisco operates. In addition to balance sheets and business models, the BD group scrutinizes would-be acquisitions' cultures and visions. The group holds meetings with everyone from junior engineers to top execs, observing who speaks and for how long, gauging how open the company is to debate and discussion, and watching how team members treat one another. "We look for cultures that empower people," says Hooper. Cisco doesn't do hostile takeovers, but it also doesn't want to buy a company whose people will head for the exits. Sometimes, an acquisition is torpedoed because of a simple gut feeling. "I've had relatively junior people come to me and say, 'I don't like the people,'" says Scheinman, "and we've walked from the deal."