Cisco's Acquisition Strategy

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"Cisco's acquisition strategy supports our efforts to be technology leaders in key markets. We have had no reason to change our acquisition strategy."¹

- A Cisco Representative.

"We acquire companies because we believe they will be successful. If we didn't believe in their success, we would not acquire them." ²

- Dennis Powell, Vice-President - Corporate Finance, Cisco Systems.

Introduction

For the fiscal 2000-01, California-based Cisco Systems Inc. (Cisco), a market leader in the networking business, reported a net loss of $1 billion. Apart from the slowdown in the global information technology (IT) industry and supply chain management problems and several other reasons, industry analysts blamed Cisco's much touted acquisition strategy for its dismal financial performance.

Cisco had acquired 71 companies (mostly start-ups with un-proven products) between 1993 and 2000. With such a large number of acquisitions made in a relatively short period, it was very important for Cisco to integrate the acquired companies and get along as a group quickly. To evaluate and integrate the acquired companies, Cisco followed a standardized methodology. Cisco's ability to integrate scores of newly acquired companies was praised by several analysts. John Morency, executive Vice President of Sage Research said, "Cisco has the uncanny ability not only to make targeted purchases, but also to integrate the company and technology well into its products and into the company."³

Cisco's acquisition strategy was working well while the IT industry was in its boom phase. However, with the beginning of the slowdown in early 2000 and the overall global economic slowdown, the situation turned bad for Cisco. By late 2000, Cisco's management found that many of its acquisitions were not performing as expected.

With the company posting a loss, analysts were quick to point fingers at Cisco's acquisition strategy. Criticizing Cisco for acquiring several companies, especially during 1999-2000, Johnson, an analyst at Robertson Stephens said, "Most of the recent acquisitions have been nothing more than mass recruiting. When there's a field that Cisco doesn't have expertise in and wants to enter, it goes out and buys the company that has the best engineers in that area."⁴ Learning from its mistakes, Cisco's management soon revised its acquisition strategy, adopting a more cautious approach. Compared to 41 acquisitions in 1999-2000, Cisco acquired only five companies during 2001-02 (Refer Exhibit I).

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1] As quoted in the article, "Can Cisco keep up its shopping spree," by Wylie Wong, in CNET News.com, November 6, 2000.

2] As quoted in the article, "Acquiring Minds," by George Donnelly, CFO Magazine, September 01, 1999.

3] As quoted in the article, "Sizzling Cisco: IT Takes Starring Role in Cisco's Acquisitions Adventures," Marguerite Reardon, posted on www.informationweek.com, dated February 28, 2000.

4] As quoted in the article, "Cisco Shopped Till It Nearly Dropped," by John A. Byrne, and Ben Elgin, in Business Week, January 21, 2002.