Cisco Began Its Acquisition Spree in 1993

Cisco began its acquisition spree in 1993 with the purchase of Crescendo Communications Inc. (Cisco, 1993). The purpose of this acquisition was to acquire a product that Cisco's customers wanted, but that Cisco did not at the time provide. Over the rest of the 1990s, Cisco focused on that type of expansion, totaling 71 acquisitions and a massive growth in the size of the company both in terms of revenue and employees (Ibid). The company was driven to make these acquisitions because it wanted to serve its major customers better.

Cisco was selling to firms like Ford and Boeing, and it was under pressure to add new products to its lineup in order to meet their needs. Acquiring companies that already had those products was seen by Cisco management as the quickest way to meet this market need to hold competitors at bay. The initial acquisitions were made in this ad hoc fashion, as needed, without any coherent plan.

As acquisitions were clearly becoming a major part of the company's strategy, Cisco sought to develop a set of acquisition criteria to guide the acquisition process in a more strategic manner. The company built the strategy around the need for speed -- once a target was identified, Cisco wanted to buy it and begin the integration process quickly in order to minimize the risk to the company that was associated with a long integration process and slower response time to customer needs. Q2.

There were five key elements to the acquisition strategy, according to Singh and Chaudhuri (2008). The first element was that "the target and Cisco share a compatible vision of the future from both an industry and product perspective." This is important because Cisco values a rapid integration process for new acquisitions. If there are major issues with respect to vision, then this integration process will not be possible.

The second element is "The acquisition will produce a quick win for Cisco shareholders, preferably within 12 months of purchase." This falls under the 'obvious' category because no company wants to make acquisitions that are detrimental to its own interests. The key here is that Cisco sees this element as orienting it towards acquiring companies for which it has an immediate use or need.

The Crescendo acquisition is a good template for this element -- Cisco was able to immediately derive value from the acquisition by selling Crescendo products to Ford and Boeing. Future acquisitions needed to have this immediate utility as well. The third element is "The companies share complementary culture," or "the right chemistry." This is fairly similar to the first element, and exists because culture clash can create significant integration problems.

Cisco wanted to orient its acquisition activities towards companies that were fast-moving, innovative and entrepreneurial, as these traits would mean that any acquisition would be receptive to the growth prospects that would come with being a part of Cisco. Strong independent streaks in the corporate culture would perhaps be a red flag for Cisco in terms of integration, as would an emphasis on maintaining the status quo.

The fourth element is that "there exists long-term wins for the four major constituencies -- shareholders, employees, customers and business partners." Like the second element, this one is kind of obvious. It also repeats the shareholder perspective of the second element, and does so first. That means that this element is self-contradictory, because if shareholders are so important as to have their own element, and then top billing in this one, the other stakeholders are actually not that important and this element is little more than lip service.

Yes, Cisco wants everybody to win all the time, but the emphasis on shareholders is a strong statement of intent in these five elements, while the relative lack of emphasis on the other stakeholders makes it clear that any gains to them are nice bonuses to have once the shareholders are taken care of.

The fifth element is "for large acquisitions, the target is geographically close to a Cisco office." This is the most specific and useful of the five elements, because it is concrete, objective, and there is a clear reason for it. Even in a world brought together by mass communications, Cisco knows that being able to maintain close control over its acquisitions is critical for rapid integration. Further, this close control can only be done in person.

Moreover, the closer the acquisition is to head office in San Jose, the more similar the culture probably will be. 3. As noted, the three elements (1, 3, and 5) that relate to the rapid and smooth integration process are all internally consistent. Cisco's expansion during this period was focused on multiple significant acquisitions every year, and the desire to make Cisco a very large company, able to meet the needs of other very large companies.

With this vision, Cisco knew that it needed a lot of acquisitions and flowing from that these acquisitions needed to be integrated into the company very quickly. Examining elements 1, 3 and 5, it is evident that all three of these support the ability of Cisco to integrate the acquisitions quickly and easily. Cartwright and Cooper (1993) noted that cultural compatibility is essential to successful merger and acquisition activity. Weber, Shenkar and Raveh (1996) support this idea, noting that national culture is also important, especially for the role that it plays in corporate culture.

The fifth element, noting the need for geographical closeness, and the first element directly reflect the importance of culture that Weber et al. noted. The major area where the elements do not demonstrate much internal consistency is with the second and fourth elements. The first problem is that both are obvious, as opposed to actually being serious elements to an acquisition strategy. All companies view all acquisitions as needing to be beneficial to shareholders and other stakeholders.

While these elements state the obvious, they also both feature the shareholders as the headline stakeholder. This is consistent, but the fourth element also features other stakeholders, subordinated to the shareholders. While doubtless Cisco management would like for its acquisitions to meet the needs of employees, partners and customers, the elements do nothing to explain priority, nor how goal conflicts between the different shareholders will be resolved. Sometimes, an acquisition cannot benefit everybody, and Cisco needs to know ahead of time how it will deal with that.

Clearly, the shareholders are going to be given precedence, but even with that there is the issue of short-term and long-term orientation. For customers, longer-term benefits are probably better, and will drive long-term profitability as well. However, short-term benefits to the shareholders can sometimes conflict with long-term benefits to the shareholders. It appears that the desire for quick returns trumps the desire for long-term gains with respect to shareholders, so there is at least some guidance in the elements there.

However, the lip service paid to other stakeholders does not offer much clarity, and seems contradictory with the heavy emphasis on shareholder benefits from such transactions. Q4. The elements themselves do not create value specifically -- the value lies.