CHAMBERS

The Art of the Deal

After acquiring 40 companies in 6 years, Cisco's CEO knows how to size up a buy.

Interview by James Daly
jdaly@business2.com

Photography By Cristina Taccone

Behind the bright-eyed charm and soft Southern accent of Cisco Systems President and CEO John Chambers lies one of the savviest dealmakers in corporate America. Since the former IBM and Wang Laboratories marketing and sales veteran joined San Jose, Calif.-based Cisco Systems in 1991, he has led the company's efforts to acquire its way to a dominant position in the marketplace. Chambers, 50, has rarely let his checkbook rest, buying up 40 companies in 6 years. The nearly $200 billion company already has acquired 10 companies this year; four firms were picked up in one 10-day burst in August, including the $6.9 billion purchase of Cerent. Few understand the complexities of assessing, purchasing, and assimilating a new company as well as Chambers.

Does Cisco's frenetic acquisition pace serve as a harbinger for the rest of the industry? Are mergers and acquisitions now just another form of outsourced R&D?

They are a requirement, given how rapidly customer expectations change. The companies who emerge as industry leaders will be those who understand how to partner and those who understand how to acquire. Customers today are not just looking for pinpoint products, but end-to-end solutions. A horizontal business model always beats a vertical business model. So you've got to be able to provide that horizontal capability in your product line, either through your own R&D, or through acquisitions.

You're not simply acquiring new products, though, but the talent that produced them.

And that's what a lot of companies miss. When we acquire a company, we aren't simply acquiring its current products, we're acquiring the next generation of products through its people. If you pay between $500,000 and $3 million per employee, and all you are doing is buying the current research and the current market share, you're making a terrible investment. In the average acquisition, 40 to 80 percent of the top management and key engineers are gone in two years. By those metrics, most acquisitions fail.

How do you measure success in your acquisitions?

Real simple. Retention of people and revenue that you generate two or three years later.

Have any not worked out as well as you'd have liked?

At Cisco, we've done dozens of acquisitions and all but two or three have worked out to my expectations.

Which ones?

First, I'm not going to say, because I don't want people who come over to view their CEO as a failure. But they were my mistake. I made the mistake of acquiring software companies without having the distribution channels. So the people were good, but I did not have distribution capabilities. I underestimated our existing channel's ability to move stand-alone software. If you watch what we do with our acquisitions of GeoTel Communications and Amteva Technologies, we've changed that now. We're building an overlay organization to move the software. But anyone who takes risks and does not make mistakes is kidding themselves — you're not taking a risk. And companies who say, "We're risk takers" and then you ask their key employees, well, what happens if you miss and they say "I get shot," they aren't risk takers either.

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