When
Internet networking gear maker Cisco Systems Inc. enters a deal to buy
another company, it can't help wanting to move fast. Cisco has a long
track record of making technologically smart acquisitions that almost
always increase its revenues, expand its product portfolio, improve its
competitive edge and ultimately grow its share price.
But the San Jose, Calif., company has also learned to stop itself
at that exuberant stage in the acquisition process, take a deep breath,
and turn its focus to smaller details -- such as espresso machines.
The machines are a familiar feature in the young Silicon Valley
companies that Cisco has traditionally targeted, and a favorite perk of
the talented staff Cisco must retain to make the deals work. "It's
amazing how emotional people get about coffeemakers," says Graeme Wood,
director of acquisition integration at Cisco. Sensitivity to such
issues figures prominently in the playbooks Wood has used to
orchestrate the integration of about 30 businesses, which have
collectively transformed Cisco from a manufacturer of basic gear for
connecting computers to a high-tech powerhouse that is on its way to
touching every aspect of networking.
The transformation accelerated with last year's $6.9 billion
purchase of television set-top box maker Scientific-Atlanta Inc., a
major step into the consumer segment of the market for Cisco. That deal
also brought San Jose, Calif.-based Cisco a different set of
integration challenges than the company is accustomed to. It isn't just
that there are no espresso machines to worry about. ("It's just a plain
machine with coffee and decaf," says a Scientific-Atlanta spokeswoman.)
Scientific-Atlanta is a 7,600-employee company based thousands of miles
away in Lawrenceville, Ga., with revenues about 100 times the size of
the usual Cisco acquisition. Founded in 1951, it is old enough to be
Cisco's parent, so to speak, with its own established culture.
It's one thing to fold small Silicon Valley firms into Cisco. How
has Cisco gone about integrating Scientific-Atlanta since the deal
closed a year ago? The answer is slowly, thoughtfully and by adapting
the same basic principles it has developed in previous deals. Indeed,
the more complex the integration, the more important it is not to lose
sight of what it will take to get employees on board and make the deal
a success. "The first two letters of the word merger are 'me,' " says
Punit Renjen, managing director of Deloitte Consulting's merger
integration practice. Poor employee morale, Renjen says, is a big
factor in the historically low success rate of acquisitions.
At Cisco, Wood has learned that people at a company that has just
been bought are usually in a defensive mode, worrying whether they will
even have a job, and if so, how it will change. Will they have to learn
a new system for filing expense reports? Will the health insurance
cover acupuncture? What will become of their old parking spaces? Will
they be allowed to work from home on Fridays? "What we try to do
quickly is remove all the 'What about me' questions, and give all
incoming employees the opportunity to be valued Cisco employees so they
can focus on other things," Wood explains.
Cisco considers these questions before it goes about setting new
business targets or merging the two companies' products. It pays more
than lip service to that old cliché about employees being the most
important part of the business. Employee retention, in fact, is one of
the key metrics Cisco uses to judge the success of the acquisition,
along with hard financial metrics like revenues. "We want the thing we
buy to be a part of Cisco for the long term," Wood says. "We're not
just raping and pillaging the technology they built."
Today Cisco says that -- excluding Scientific-Atlanta, which is
still being integrated -- one in eight of its 54,563 employees came to
the company through acquisition. Of all the 117 companies Cisco has
acquired in its 23-year history, half of those employees are still at
Cisco, and 85% of the employees from the 45 companies Cisco has bought
in the last five years remain at Cisco today.
About 34 of the acquired companies' CEOs are now part of Cisco's
management team, many serving in prominent positions. Ned Hooper, vice
president of corporate development, came from LightSpeed International
Inc., which Cisco bought in 1998. Chief development officer Charles
Giancarlo came from the 1994 acquisition of Kalpana Inc. Jayshree
Ullal, senior vice president of the data center switching and security
technology group, and Randy Pond, senior vice president of operations
processes and systems, both joined by way of Crescendo Communications
Inc., which Cisco bought in 1993.
Making new employees feel welcome is more than just a
touchy-feely matter. Cisco does distribute T-shirts and throw office
parties to help build teamwork. At the same time, though, an
integration manager and a cross-functional team are working their way
through long lists, called integration playbooks, consisting of
hundreds and sometimes thousands of mundane deliverables that need to
be checked off. Every department from human resources to finance to
marketing contributes people to the team, which typically has about 40
dedicated people supporting all of the parallel integration activities.
On a large deal, the full complement of dedicated and virtual resources
may peak at about 200 people.
Legal gets to work reviewing the target's customer contracts and
harmonizing the terms with Cisco's; the finance folks do the same with
reporting practices. "There are thousands of deliverables and each
deliverable has hundreds of tasks on it," Wood says. One item at a
time, the "what about me" concerns gradually evolve into a "what about
us" way of thinking.
Outside observers impressed with Cisco's ability to absorb so many
businesses into its fold sometimes describe the company's successful
integration process as an art, but anyone who sees how it
systematically assembles and then checks items off to-do lists,
realizes that it is less art than science, and perhaps less science
than a kind of meticulous engineering that's familiar to most
successful serial acquirers. Wood, who leads a team of four integration
specialists, says that where Cisco has shined is by developing an
understanding of how to sequence these tasks so that the integration of
multiple functions is achieved simultaneously while the disruption of
company operations is minimal and the completion is swift.
The company uses this same sort of holistic approach when setting
benchmarks for the acquired company's performance and following through
to make sure they are met. The general manager of the business unit
that is acquiring the company holds ultimate responsibility for the
acquired company's performance, but Cisco considers performance in the
broadest sense -- not just meeting sales goals but also making sure
technology innovations continue and valued employees stay engaged.
Early on, the business development team does an analysis of all the
things Cisco wants the acquired company to achieve, and then works with
different departments to communicate those goals. "No one works in a
vacuum," Wood says. "A lot of companies are organized into divisions
that have ultimate profit and loss responsibility, which makes it easy
to say who is responsible for every aspect of the integration. We have
a collaborative approach that achieves the same thing."
From Cisco's perspective, providing a smooth and timely transition
for each incoming employee helps ensure the entire integration will go
as planned. "The worst thing you can do is to tell people to wait,"
explains Brett Galloway, vice president and general manager of Cisco's
wireless networks business unit. "That is when they start to dust off
their résumés."
Galloway came to Cisco in the 2005 acquisition of wireless
networking equipment maker Airespace Inc., where he was CEO. Although
Airespace was then a four-year-old, 175-person company with a startup
culture vastly different from that of Cisco, Galloway said Cisco moved
swiftly to make it a smooth transition as it retained workers (90%
stayed on) and at the same time addressed business goals. One detail
Galloway recalls being particularly impressed about: Airespace's
products showed up on Cisco's price list from the day the merger
closed, but also remained available from Airespace's old contract
manufacturer, so that customers were not unduly confused. "My sense was
that the integration at Cisco started before the close," he says.
Indeed, Wood maintains that from the time the acquisition team
identifies a potential target, it is thinking about how well the two
companies will meld. As one of the largest companies in the U.S. with a
complex organizational structure and multiple operating units, Cisco's
culture inevitably differs from that of a 100-, or 200-person company.
Also, if the cultures really seem to clash from the beginning, Cisco
will not pursue the company, no matter how tempting the technology.
"If you don't like each other while you're dating, it doesn't help
to get married," Wood says. "Successful integration starts with
successful selection."
Likewise, if the two companies seem to click, Cisco will go
to lengths to make the negotiations painless and help guarantee that
the companies get off to a good start. Bankers who have worked with
Cisco say that while it has a great sense of appropriate deal prices,
it will pay a little bit more rather than quibble endlessly and risk
creating resentment. "The company is much more focused on retention
than on whether or not they have to pay a dollar more per share," one
banker explains.
In business, as in love, chemistry can mean a lot of different
things, from sympathetic personalities, to geographic proximity,
similar goals for the future and even timing. Like all companies
adjusting to the tougher business climate following the collapse of the
dot-com bubble, Cisco has grown a little less romantic about its
targets. It no longer pursues very young startups that have lots of
ideas but no customers, instead targeting companies that are a little
more mature and have a proven track record selling technology. "In the
days of the bubble, we all got caught up in looking for ideas," says
Wood.
Traditionally, the emphasis on geographic proximity has helped Cisco
narrow its range of targets, while also leaving a large selection of
Silicon Valley businesses to choose from. Cisco had integrated so many
companies that it had developed an integration process that only needed
to be slightly tweaked each time. The brisk pace of innovation in the
Valley meant it could easily find relatively small, young companies
that had already developed groundbreaking technologies. Many of its
acquisitions even hailed from its own headquarters city in San Jose. If
this were dating rather than dealmaking, you'd say that Cisco had a
definite type.
It strayed from that usual "type" in a big way late in 2004 when it
agreed to buy Scientific-Atlanta. Besides the differences in geography
and scale, there's a big contrast in the markets the companies serve.
Scientific-Atlanta's boxes help deliver cable or high-definition
television to consumers rather than corporate customers, Cisco's
historical focus. Integrating it would be a lot more complicated than
just folding it into Cisco. "It was a leap of faith," Wood acknowledges.
Cisco said from the start that the integration process would last
two years and that Scientific-Atlanta would retain much of its
traditional identity and be known as "Scientific-Atlanta: a Cisco
company." Today, about a year after the deal closed, Scientific-Atlanta
workers still have separate health benefits from the rest of Cisco.
Still, Cisco got started on this lengthy integration immediately and
introduced changes, big and small, that would help workers based in
Georgia share Cisco's identity. Scientific-Atlanta was immediately
converted to Cisco's holiday calendar, and its employees were given new
office access cards that work both at their offices in Georgia and
Cisco's San Jose headquarters.
"Right after the announcement, they put integration teams in place
and began high-level discussions," says Jim Strothman, director of
product management at Scientific-Atlanta, who today holds the same
title he did before the acquisition. Cisco CEO John Chambers and other
senior executives traveled to Scientific-Atlanta's headquarters to get
employees on board by presenting their vision of how the acquisition
would open new markets for Scientific-Atlanta. While smaller companies
often have a single emotional or spiritual leader who can sway all
employees to get behind a big change, when the company has several
thousand workers, there is more room for skepticism.
Cisco's purchase of Scientific-Atlanta is commonly portrayed as the
deal that brought Cisco a presence in the fast-growing Internet
television, or IPTV, market. The deal actually did the same for
Scientific-Atlanta, whose equipment was most commonly used to deliver
cable, and did not have enough high-tech support to address the notion
of the connected home, in which voice, video and data are delivered
through a single service and made available through the television,
computer and wireless devices. For that reason, Strothman said that the
biggest change resulting from the Cisco acquisition was that it opened
up a lot of new opportunities for Scientific-Atlanta. He said Cisco was
able to communicate that potential from day one, while still pacing the
integration gradually enough so that most employees' job titles and
day-to-day duties did not change.
Besides, chemistry is a funny thing. You never know when two
opposites will hit it off. Strothman said that during his five trips to
Cisco headquarters over the past year, he has found a very similar
corporate culture to the one he was used to.
Cisco is still a year away from completely absorbing
Scientific-Atlanta, and it will take some more time after that to
determine whether the deal was a success. But the early financial signs
are promising: the company cited Scientific-Atlanta as a contributor to
strong results in the fiscal second quarter of 2007. Still, in an
ultra-fast-paced industry where new products and services are rolled
out so quickly they are hard to keep track of, it may be Cisco's
willingness to adapt its usual integration approach and take its time
with Scientific-Atlanta that best shows its skill at incorporating new
companies.
"We're making it a long, slow, steady process," says Wood. Speed is
still important. It's just that some things are more important. "It
goes against the long-term mantra of 'be speedy.' " - Andrea Orr
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