Cisco's Acquisition Strategy: Value Creation and Integration

Introduction: Cisco's Acquisition History

Cisco began its acquisition spree in 1993 with the purchase of Crescendo Communications Inc. (Cisco, 1993). The purpose of this acquisition was to obtain 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, completing 71 acquisitions and achieving massive growth in both 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 address this market need and hold competitors at bay. The initial acquisitions were made in this ad hoc fashion — as needed, without any coherent plan.

As acquisitions clearly became a major part of the company's strategy, Cisco sought to develop a set of acquisition criteria to guide the 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 associated with a prolonged integration timeline and slower response to customer needs.

The Five Elements of Cisco's Acquisition Strategy

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 differences in vision, then swift integration will not be possible.

The second element is that "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 is that Cisco sees this element as orienting it toward 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 it by selling Crescendo products to Ford and Boeing. Future acquisitions needed to have this same immediate utility.

The third element is that "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 toward companies that were fast-moving, innovative, and entrepreneurial, as these traits would mean any acquisition would be receptive to the growth prospects that come with being part of Cisco. Strong independent streaks in 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 exist long-term wins for the four major constituencies — shareholders, employees, customers, and business partners." Like the second element, this one is somewhat obvious. It also repeats the shareholder perspective of the second element and does so first. That means this element is self-contradictory: 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 amounts to little more than lip service. Cisco clearly wants everybody to win, but the emphasis on shareholders is a strong statement of intent across these five elements, while the relative lack of emphasis on other stakeholders makes it clear that any gains to them are nice bonuses once shareholders are taken care of.

The fifth element is that "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 has a clear rationale. Even in a world brought together by mass communications, Cisco recognizes that maintaining close control over its acquisitions is critical for rapid integration — and that such close control can only be exercised in person. Moreover, the closer an acquisition is to Cisco's head office in San Jose, the more similar the corporate culture is likely to be.

Conclusion

Cisco's acquisition strategy succeeds where it is most concrete and integration-focused. Elements 1, 3, and 5 form a coherent cluster that supports rapid absorption of new companies and reflects well-established research on the importance of cultural compatibility in M&A. Elements 2 and 4, by contrast, are partly redundant, leave stakeholder prioritization unresolved, and offer insufficient guidance when the interests of shareholders and other stakeholders conflict. Overall, the strategy's greatest contribution is not any single element but the framework itself, which enables Cisco to identify, evaluate, and integrate acquisition targets more efficiently than an ad hoc approach would allow.

Works Cited

Cartwright, S. & Cooper, C. (1993). The role of culture compatibility in successful organizational marriage. Academy of Management Executive, 7(2), 57–70.

Cisco (1993). Cisco Systems corporate timeline. Cisco Systems press release. Retrieved December 14, 2008, from

Singh, H. & Chaudhuri, S. (2008). Cisco's acquisition strategy (1993 to 2000): Value growth through buying early-stage companies. Wharton School, University of Pennsylvania. In possession of the author.

Weber, Y., Shenkar, O., & Raveh, A. (1996). National and corporate cultural fit in mergers/acquisitions: An exploratory study. Management Science, 42(8), 1215–1227.