Cisco Iron Port

Cisco Systems: New Millennium – New Acquisition Strategy?

03/2010-5669

This case was written by Nir Brueller, Adjunct Professor of Strategy and Affiliated Senior Research Fellow at INSEAD, and Laurence Capron, Professor of Strategy at INSEAD and Research Director of the INSEAD-Wharton Alliance. It is intended to be used as a basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation.

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Copyright © 2010 INSEAD 1 03/2010-5669

Returning to his office in San Jose from the Christmas break on 2 January 2007, Richard Palmer, Senior Vice President of Cisco Security Technology Group, was still reflecting on his intense discussions over the past few months with Cisco Corporate Development Group about the ongoing negotiations with Scott Weiss, CEO of privately-held IronPort Systems of San Bruno (California). IronPort was the leading provider of email security solutions, focusing on spam and spyware protection for the enterprise market.

By 2007, Cisco was the world leader in networking technology for the internet, having grown from two employees with one product in 1984 to more than 63,000 people, 200 offices worldwide, and 50 product lines. Its product portfolio consisted of several categories: network systems (routers, switches, optical networking), data centre (application networking services, storage networking, data centre switches), collaboration, voice and video (voice and unified communications, video, IPTV, cable and content delivery solutions), mobility/wireless (access points, outdoor wireless, wireless LAN controllers) and security (firewall, virtual private networks, security management). Cisco was also considered to be a best-in-class acquirer of high-tech companies by industry experts as well as corporate strategy practitioners.

Weiss had not yet accepted the handsome offer of $830 million made by Cisco. Palmer was convinced that the price he had offered was justified by the great strategic fit of IronPort with Cisco’s portfolio. The security products and technology from IronPort added a rich and complementary suite of messaging solutions to Cisco’s industry-leading threat mitigation, confidential communications, policy control and management solutions. At a meeting with Cisco’s Corporate Development team in December 2006, Palmer explained:

“We feel there is enormous potential for enhanced e-mail and message protection solutions to be integrated into the existing Cisco Self-Defending Network framework. Using the network as a flexible platform to integrate IronPort’s technologies, Cisco will be able to build new security applications as customers’ demands evolve”1

Palmer wondered how he could further negotiate with Scott Weiss to clinch the deal. During the last meeting, Cisco Corporate Development Group, which had forged a great reputation over the years for providing discipline on the acquisition process, had made it clear that the proposed $830 million was the walk-away price. Among the non-price factors, Palmer had to negotiate a number of post-acquisition “integration” issues. In particular, he knew that IronPort was keen on remaining a standalone business unit within Cisco. Weiss wanted to retain the relationships and go-to-market strategies that he had built. Although the IronPort acquisition offered opportunities to weave together the two firms’ technologies, it represented a significant stretch from Cisco’s security strategy, moving it from the network to the application layer.2 Furthermore, despite Cisco’s interest in IronPort’s subscription-based pricing model, it had no real experience with it. Lastly, there was also internal resistance within IronPort’s ranks to being integrated into Cisco.

1 Hagendorf Follett, J. (2007). Cisco Gets The Message With $830M E-Mail Security Acquisition.

ChannelWeb, 4 Jan, http://www.crn.com/security/196800933;jsessionid=DL2OXYG2RW4KNQE1GHOSKHWATMY32JVN

2 http://www.ironport.com/company/pp_commweb_01-04-2007.html


Palmer was wondering what would be the right integration approach for IronPort and how much he should give up in the negotiation. Should Cisco depart from the tried-and-tested formula for managing young high-tech firm acquisitions for which it had become so famous? Should Cisco adopt an integration approach closer to its recent big acquisitions of Linksys and Scientific-Atlanta, both of which were focused on the consumer market? IronPort, in focusing on Cisco’s core segment – enterprise customers – presented some unique opportunities and challenges. While addressing these issues was important, Palmer did not want the talks to lose momentum. He had made good progress so far and was hoping to come to an acquisition agreement in the next few days, when IronPort and Cisco’s employees returned from the Christmas break.

Cisco’s Early Years (1984-1993)

Cisco was founded on December 10, 1984 by husband and wife Len Bosack and Sandy Lerner, two former Stanford University computer scientists whose efforts to enable email between computers on different networks led to the invention of the first multiprotocol router. This seminal breakthrough played a major role in fuelling the growth of the internet.

The first challenge came very early on when Len and Sandy failed in their attempts to sell to existing computer companies the technology they had designed to connect two separate local area networks (LANs).3 They decided to market their routers directly to universities, research centres, government facilities and the aerospace industry. In 1986, Cisco shipped its first product, a router for the TCP/IP (Transmission Control Protocol/Internet Protocol) protocol suite. With just eight employees, Cisco managed to sell $1.5 million worth of routers in the fiscal year ending July 1987.4 With limited financial resources, marketing relied on approaching computer scientists and engineers via ARPANET (Advanced Research Projects Agency Network), the precursor to the internet. In 1988, the company started marketing its routers to mainstream corporations with geographically dispersed branches using different networks.

To this end, Cisco had to further develop its technology and extend the range of communications protocols it supported. Over time, its ability to support more protocols translated into a differentiation advantage over other router manufacturers.5 By the late 1980s, when the commercial market for internetworking began to develop, Cisco’s reasonably priced, high-performance routers gave it a head start over its networking competitors (Bridge Communications Inc., 3Com Corporation, Proteon Inc., Wellfleet Communications). Cisco was developing industry standards and now had a list of customers including the US Army, Boeing, Hewlett Packard, General Electric and Morgan Stanley.

These early days, in which it had to survive on a very tight budget, shaped Cisco’s frugal nature for many years to come. In fact, to get the venture off the ground Bosack and Lerner had to mortgage their house, run up credit card debts, and defer paying salaries to friends who worked for them. For a while, Lerner even maintained an outside salaried job to supplement the couple’s income.

3 http://www.fundinguniverse.com/company-histories/Cisco-Systems-Inc-Company-History.html 4 ibid. 5 ibid.


In 1987, when sales started growing quickly, Bosack and Lerner were forced to turn to venture capitalists for support.6 Donald T. Valentine, the founder of Sequoia Capital, agreed to invest $2.5 million in first-round financing in Cisco.7 As part of the deal he took over management of the company and required the owners to sign that Sequoia Capital retained the right to force the founders out at will.8 Valentine became chairman and quickly hired an outsider, John Morgridge, a Stanford MBA and a veteran of laptop computer manufacturer GRiD Systems Corp., as the company’s new president and chief executive officer. Over the next few years, Morgridge replaced top management with outside hires and in February 1990 Cisco went public. Six months later, following an ultimatum by seven of the company’s vice presidents, Lerner was let go. Shortly afterwards, Bosack resigned from the board of directors and then left Cisco entirely.9

In the period 1991 through to 1993, Morgridge set the tone for Cisco’s culture and operational methods. He ran the business with an emphasis on cutting costs and made sure that Cisco continued the strong customer focus that had enabled it to progress so rapidly in the mid 80s. Morgridge built up direct sales to market the products to large corporate clients. At first, Cisco focused on the high-end corporate network market, targeting corporations which already maintained large internal networks. Few companies were able to offer the same array of end-to-end networking services and products. Among those who could, Cisco’s four largest competitors were Lucent Technologies, Alcatel, Juniper Communications and Nortel Networks. As operations expanded, Cisco started to face competition from innovative and lean niche players such as 3Com Corporation and Bridge Communications Inc., notably in the small- and medium-size business sector.

Cisco’s Corporate Strategy (1993-1999)

As Cisco’s client base grew, the company’s greatest challenge became meeting customer service and support needs. With the coming-of-age of the internet and the growing popularity of corporate in-house intranets, more demands were put on Cisco to provide a complex variety of networking solutions.10 To dominate such a market, Cisco executives knew that they would not be able to develop internally all the technologies needed with enough speed, especially with product cycles dropping below 18 months. In order to keep abreast of the changes,11 Cisco resorted to external sourcing and set a relentless pace for acquisitions. John Chambers, who joined Cisco in 1991 as senior vice president of worldwide sales and operations and operated as John Morgridge’s right hand man for four years before replacing him as CEO, observed:

“We got very bold. We made the conscious decision that we were going to attempt to shape the future of the entire industry. We decided to play very aggressively

6 Poole, H.W., ed. (2005) The Internet: A Historical Encyclopedia. Santa Barbara, CA: ABC-Clio. 7 ibid. 8 ibid. 9 ibid. 10 Rifkin G. (1997). Growth by acquisition: the case of Cisco Systems. Strategy and Business. Booz Allen and

Hamilton, New York. 11 Mayer D, Kenney M. 2004. Economic action does not take place in a vacuum: understanding Cisco’s

acquisition and development strategy. Industry and Innovation 11(4): 299–325.


and truly attempt in the networking industry what Microsoft did with PCs and IBM did with mainframes.”12

Facing pressure to provide a wide set of networking solutions and products, Cisco decided to adopt General Electric’s mentality of aiming for a 50% market share and a No.1 or No.2 position in every market it entered, avoiding markets in which it could not get at least a 20% share “right off the bat”.13 Management created a matrix of emerging markets and niches in which it had decided to become market leader. These markets were identified through conversations with customers, reading the trade press, attending industry conferences and listening to bankers and entrepreneurs.14

Once a market was identified, the next step was to determine its product, services and distribution needs and choose the appropriate mode for getting the products developed and sold. This could be done either internally, through joint development, or through acquisition. Cisco preferred to use its internal R&D organisation for product development and used this mode for 70% of its products.15 Nevertheless, the company understood that if it wanted to dominate such rapidly changing markets, it could not hope to rely exclusively on internal development. Therefore, Cisco created a rule of thumb that if it did not have the resources to become a market leader within six months, it would look to buy its way in, which it did for 30% of its products. It also decided that time-to-market should be the underlying rationale for its acquisitions, in light of Chambers’ view that, “If you don’t have the resources to develop a component or product within six months, you must buy what you need or miss the opportunity.”16 Finally, Cisco adopted an interim mode of making minority investments in several advanced technology companies prior to when their technologies were actually needed. This enabled Cisco and target personnel to test the water with respect to working together on a regular basis.17 However, special attention had to be given to the use of the right governance mode in every case. Cisco preferred to pursue acquisitions only when their underlying technologies were market-ready, in light of Morgridge’s belief that there was nothing worse than big companies that over-invested in markets before their time.18

Cisco’s strategic plan, crafted in 1993, consisted of four main components:19 (1) Assemble a broad product line in order to provide customers one-stop-shopping for networking solutions, (2) Systemise the acquisition process, (3) Define industry-wide software standards for networking equipment, and (4) Pick the right strategic partners.

In January 1995, Chambers was appointed CEO of Cisco, with Morgridge becoming chairman and Valentine vice-chairman. Chambers had been with Cisco since 1991, after working for IBM and Wang Laboratories. His experiences had shaped his view of what a 12 Rifkin G. (1997). Growth by acquisition: the case of Cisco Systems. Strategy and Business. Booz Allen and

Hamilton, New York. 13 ibid. 14 ibid. 15 ibid. 16 Bower JL. 2001. Not all M&As are alike – and that matters. Harvard Business Review, 79(3): 92-101. 17 Paulson E. 2001. Inside Cisco: the real story of sustained M&A growth. John Wiley & Sons, New York. 18 Morgridge JP, Heskett JL. 2000. Cisco Systems: Are you ready? (A): Case 9-901-002: Harvard Business

School. 19 Tempest N, Kasper C, Wheelwright S, Holloway C. 2000. Cisco Systems, Inc.: Acquisition integration for

manufacturing. Harvard Business School, Case No. 9-600-015, February 15.


healthy corporation should look like, and helped him identify some of the challenges facing Cisco:

"At the top of the list is how do you manage the growth? How do you really create the culture of mergers and acquisitions and new ideas and keep your basic strengths? How do you avoid missing the major technology changes that occur? How do you avoid creating the hierarchy where an overhead structure supporting your sales people and engineers becomes your bottleneck as you drive through it? How do you avoid getting too far away from your customers? Do I think we could trip in the future? Absolutely.”20

Chambers believed that the new rules of competition demanded organisations built on change, not stability; organised around networks, not a rigid hierarchy; based on interdependencies of partners, not self-sufficiency; and constructed on technological advantage, not old-fashioned bricks and mortar.21

During its early years, Cisco had been highly centralised in line with Morgridge’s belief that centralised organisations enjoy scale and control advantages, which firms often forego by decentralising too early.22 In 1995, Chambers started to decentralise the firm. Cisco reorganised its engineering and marketing into three lines of business, each made up of two to nine subordinate business units. The three lines of business, Enterprise, Small/Medium Business, and Service Provider, helped Cisco re-align to optimally serve each of its major customer segments. It was also in line with two of the core values underlying Cisco’s success: a strong belief in having no technology religion, and listening carefully to the customer.23

At the same time, however, Cisco decided to maintain some of its centralised functional areas, including manufacturing, customer support, finance, IT, HR and sales. The company also continued to rely on external partnerships for many of its activities. Its manufacturing strategy was based on outsourcing most of its activities such as circuit board stuffing and testing to contract manufacturers.24 It also continued to heavily rely on partnerships with other organisations such as Telcordia, EDS, INS and KPMG Consulting for the provision of networking services and solutions requiring extensive consulting, planning and integration services.25

As the internet developed, Cisco increased its reliance on information technology to automate many organisational functions and administer them online. These included employee services, e-commerce, service and support, supply chain management, finance, e-learning and many others. Once administered online they became standardised and extremely scalable. For example, only two auditors were responsible for handling the payroll for 16,000 US 20 Rifkin G. (1997). Growth by acquisition: the case of Cisco Systems. Strategy and Business. Booz Allen and

Hamilton, New York. 21 Byrne JA. 1998. The corporation of the future. Business Week, 31 August. 22 Tempest N, Kasper C, Wheelwright S, Holloway C. 2000. Cisco Systems, Inc.: Acquisition integration for

manufacturing. Harvard Business School, Case No. 9-600-015, February 15. 23 O'Reilly CA III, Pfeffer, J. (2000). Cisco Systems: Acquiring and retaining talent in hypercompetitive

markets. Human Resource Planning, 23(3), 38-92. 24 Morgridge JP, Heskett JL. 2000. Cisco Systems: Are you ready? (A): Case 9-901-002: Harvard Business

School. 25 ibid.


employees, with expenses paid within three days via direct deposit.26 Similarly, seven out of ten customer requests for technical support were fulfilled electronically with higher satisfaction rates than through human intervention. Using the network for tech support allowed Cisco to save 1,000 engineers. As Chambers indicated: “I take those 1,000 engineers and instead of putting them into support, I put them into building new products. That gives you a gigantic competitive advantage.”27 Indeed, a cornerstone of Cisco’s strategy was the view of product development as a high leverage item, enabling Cisco to reap a significant increase in sales.28

Cisco's Growth Through Acquisitions (1993-1999)

The genesis of Cisco’s acquisition strategy can be traced to the way it handled the challenge posed by the emergence of switching technology. In 1993, Cisco was in negotiations with Boeing over a significant project, estimated at $10 million,29 including routers, access devices and switches, to be integrated either by Boeing’s internal IT department or by a third-party systems integrator.30 In the midst of the negotiations, Boeing had not only stated that it preferred Crescendo’s low-cost, less functional products over Cisco’s expensive and feature-rich routers, but specifically indicated that Cisco would not get the contract unless they worked with Crescendo products, either through partnership or purchase.31 Around the same time, Ford Motor Company had also told Cisco that it was going to choose a new fast Ethernet LAN technology in which Crescendo specialised, over Cisco’s routers.

Although switches were less functional than routers, they were faster and less expensive. Networking vendors, including Cisco, started to realise that switching products would have a significant new market and turn out to be a disruptive technology with a potential to create numerous opportunities for new entrants to challenge the established data communications equipment firms, which had been slow to develop switches internally.32 Recognising this threat, Cisco’s management pondered a move into low-end LAN equipment through the acquisition of established hub makers Synoptics or Cabletron.33 However, in light of the inputs from Boeing and Ford, Chambers, Morgridge and Kozel (chief technology officer) decided that they not only had to listen to their customers but that a strategy based on the purchase of smaller, more innovative software companies made more sense than buying

26 Morgridge JP, Heskett JL. 2000. Cisco Systems: Are you ready? (A): Case 9-901-002: Harvard Business

School. 27 Byrne JA. 1998. The corporation of the future. Business Week, 31 August. 28 Tempest N, Kasper C, Wheelwright S, Holloway C. 2000. Cisco Systems, Inc.: Acquisition integration for

manufacturing. Harvard Business School, Case No. 9-600-015, February 15. 29 Reese B. 2007. The legendary Mario rule at Cisco. Downloaded from:

http://www.networkworld.com/community/node/13508 30 Wuebker R, Navoth Z, Rao B, Horwitch M, Ziv N. 1998. Cisco Systems: The Internetworking Company of

the Future. Downloaded from: http://www.ite.poly.edu/Cisco_case_3.html 31 ibid. 32 Mayer D, Kenney M. 2004. Economic action does not take place in a vacuum: understanding Cisco’s

acquisition and development strategy. Industry and Innovation 11(4): 299–325. 33 Wuebker R, Navoth Z, Rao B, Horwitch M, Ziv N. 1998. Cisco Systems: The Internetworking Company of

the Future. Downloaded from: http://www.ite.poly.edu/Cisco_case_3.html


bigger, more established ones.34 This decision marked not only the genesis of Cisco’s acquisition and development strategy but also its transformation from a router company into a full line network supplier.35

On September 21, 1993, Cisco announced the acquisition of Crescendo Communications, located in Sunnyvale, California, for about $89 million. Crescendo Communications had only $10 million in annual revenues, 60 employees, no manufacturing facilities and little overhead.36 Wall Street perceived the price as exaggerated and Cisco’s stock took a dip for the first time. As John Chambers recalled, “A lot of people thought we had lost our frugality and direction.”37

Cisco realised that in order to succeed it had to turn Crescendo into a separate business unit, kept apart from Cisco’s central engineering capabilities. It also noted that Crescendo’s industry was fragmented because time-to-market was the overriding factor, hence only small companies were fast enough to succeed.38 In addition to speedy development, Cisco realised that scaling up would also require significant distribution, financial and manufacturing strengths. Relying on Cisco’s strengths in these areas, Crescendo’s networking products were already selling at a $500 million annual run rate as early as 18 months after the acquisition. By 1998, only five years after the acquisition, they accounted for $2.8 billion in annual revenue.39 As Chambers put it, “No small company could go from $10 million to $500 million in 18 months. They just can’t scale.”40 Morgridge generalised the rationale for this type of acquisition:

"At the time we made our first acquisition we had a wonderful asset in the form of a channel to sell, install, and service products for the global market. As a result, there was tremendous leverage in acquiring a product that met the market requirement and to put it through our channels. We can take [a new product] and leverage it very dramatically. To a large degree that has been our strategy with most acquisitions.”41

Growing out of this successful first experience, Cisco’s acquisition strategy focused mostly on small acquisitions, believing that larger, more mature companies were difficult to integrate.42 Initially, Cisco was even believed to follow a rule of acquiring companies with no

34 Wuebker R, Navoth Z, Rao B, Horwitch M, Ziv N. 1998. Cisco Systems: The Internetworking Company of

the Future. Downloaded from: http://www.ite.poly.edu/Cisco_case_3.html 35 R, Navoth Z, Rao B, Horwitch M, Ziv N. 1998. Cisco Systems: The Internetworking Company of the

Future. Downloaded from: http://www.ite.poly.edu/Cisco_case_3.html 36 Mayer D, Kenney M. 2004. Economic action does not take place in a vacuum: understanding Cisco’s

acquisition and development strategy. Industry and Innovation 11(4): 299–325. 37 Rifkin G. (1997). Growth by acquisition: the case of Cisco Systems. Strategy and Business. Booz Allen and

Hamilton, New York. 38 ibid. 39 Byrne JA. 1998. The corporation of the future. Business Week, 31 August. 40 Rifkin G. (1997). Growth by acquisition: the case of Cisco Systems. Strategy and Business. Booz Allen and


acquisition and development strategy. Industry and Innovation 11(4): 299–325. 42 DePamphilis, D.M. (2005) Mergers, Acquisitions, and Other Restructuring Activities, Elsevier Academic:

Burlington, MA.


more than 75 employees, 75% of whom were engineers.43 Such companies were not only relatively cheap and easy to integrate but also enabled Cisco to successfully leverage its unique complementary assets in sales and support to its existing customer segments.44 Over time, the formula evolved into a systematic acquisition process, which Chambers often compared to marriage:

“As simple as it sounds, it’s like marriage. If you are selecting a partner for life, your ability to select that partner after one date isn’t very good. Lots of people in the financial press say once Cisco does an acquisition it is a matter of management execution as to whether the acquisition works or not. I argue with that. I think the most important decision in your acquisition is your selection process. If you select right, with the criteria we set, your probabilities of success are extremely high. It’s tough enough to make a marriage work. If you don’t spend a fair amount of time on the evaluation of what are the key ingredients for that, your probability of having a successful marriage after one date is pretty small. We spend a lot of time on the upfront.”45

Cisco’s selection process was built around a well-defined target: small companies, fast-growing, focused, entrepreneurial, in geographical proximity and culturally similar to Cisco. These targets, seen within the company as early-stage Ciscos and referred to as “Cisco kids”, were optimally suited for Cisco’s acquisition process:

“Our ideal acquisition is a small startup that has a great technology product on the drawing board that is going to come out 6 to 12 months from now. When we do that, we are buying the engineers and the next-generation product. Then we blow the product through our distribution channels and leverage our manufacturing and financial strengths. However, we would not rule out larger acquisitions if the industry changes faster than we expected or where there is more of an integration than we expected. Do we have anything larger in mind at the present? No. Our more typical acquisitions will continue to be smaller engineering organisations. We will continue to go after private companies. You can acquire them much quicker and with far fewer legal nightmares. There is also a lot less risk in those types of deals.” 46

To enhance the chances of synergy realisation, Cisco used four criteria for evaluating small targets and a fifth for larger ones:

“First, if your visions are not the same – about where the industry is going, what role each company wants to play in the industry – you are constantly going to be at war. There can be differences in technology visions or industry visions, so you have to look at the visions of both companies and if they are dramatically different you should back away. Second, you have to produce quick wins for your

43 Eisenhardt, K. M. & Sull, D. N. (2001). Strategy as simple rules. Harvard Business Review, January: 107-

116. 44 Tempest N, Kasper C, Wheelwright S, Holloway C. 2000. Cisco Systems, Inc.: Acquisition integration for

manufacturing. Harvard Business School, Case No. 9-600-015, February 15. 45 Rifkin G. (1997). Growth by acquisition: the case of Cisco Systems. Strategy and Business. Booz Allen and

Hamilton, New York. 46 ibid.


shareholders. If we did not produce a win with Crescendo in the first year, our shareholders would have been all over us. And if it is only short-term, then it is not strategic. Shareholders have to benefit from any acquisition. Third, you have to have long-term wins for all four constituencies – shareholders, employees, customers and business partners. I know that sounds corny but it is true. Finally, the chemistry has to be right, which is hard to define. The fifth element – for large mergers and acquisitions – is geographic proximity. Geography is key. If you are doing a large acquisition, the minute you get on an airplane, you’ve got a problem. It is different if you are doing an engineering or technology acquisition, because those can be remote. But if you are combining two large companies and the centre of manufacturing or marketing is in San Jose, Calif., and you are in Boston, what future do you have? It is very limited.” 47

Indeed, Cisco strictly adhered to the selection criteria; if these were not in place, it preferred to walk away from the deal:

“We’ve killed nearly as many acquisitions as we've made. We killed acquisitions for those reasons even when they were very tempting. I believe it takes courage to walk away from a deal. It really does. You can get quite caught up in winning the acquisition and lose sight of what will make it successful. That’s why we take such a disciplined approach.” 48

The due diligence process was also carried out with integration in mind. It served the company in assessing the different aspects of the target such as talent, technology, management and financing, all of which were aimed at validating the selection decision and facilitating later integration. Indeed, the two keys for successful acquisition, namely selection and integration, were strongly tied to a thorough due diligence process. To ensure the success of its acquisitions, Cisco’s integration process was focused on three goals – in descending order of importance: (1) employee retention, (2) follow-up on new product development, and (3) return on investment.49

Chambers regarded employee retention as a primary goal:

“Most people forget that in a high-tech acquisition you really are acquiring only people. That’s why so many of them fail. At what we pay, $500,000 to $2 million an employee, we are not acquiring current market share. We are acquiring futures.”50

Indeed, turnover among acquired employees was only 8%, the same as for Cisco’s long-term employees,51 versus an average of 20% for other software and hardware companies.52 For 47 Rifkin G. (1997). Growth by acquisition: the case of Cisco Systems. Strategy and Business. Booz Allen and

Hamilton, New York. 48 ibid. 49 Tempest N, Kasper C, Wheelwright S, Holloway C. 2000. Cisco Systems, Inc.: Acquisition integration for

manufacturing. Harvard Business School, Case No. 9-600-015, February 15. 50 ibid. 51 ibid. 52 DePamphilis, D.M. (2005) Mergers, Acquisitions, and Other Restructuring Activities, Elsevier Academic:

Burlington, MA.


example, in 2001 over 90% of the entire Crescendo workforce were still with Cisco, an outstanding figure after an interval of eight years, which included the period of the technology bubble of the late 1990s.53 With such retention figures, Cisco was able to insist that acquired employees waive their accelerated vesting rights in return for a more gradual vesting schedule. Accelerated vesting clauses, common in many employment contracts, were intended to protect employees who feared that they might lose their jobs (and non-vested options) in the event of an acquisition.54 Cisco’s track-record of successful retention signalled that this risk was very low.

In order to speed up the introduction of products from newly-acquired companies, Cisco chose to apply its new product introduction (NPI) process to these products as well. This called for incorporating cross-functional inputs from marketing, engineering and manufacturing into product design, to ensure products’ functionality, manufacturability, testability and cost-effectiveness.55 While Cisco aimed at quickly converting as many newly acquired products as possible, it focused its efforts only on products at an early stage of development.

One of the CEOs who had sold his company to Cisco described the post-merger integration phase:

“Cisco is really good at this – probably better than any other hi-tech company that I have seen. They call it the integration ‘Jumbo Team’: they come with a jumbo, they ‘land on you’ and they ‘Ciscofy’ you.”56

Another former executive testified to the post-merger experience of the target’s R&D team:

“It takes you a year to actually figure out where you are, because, for one thing, they want you to continue working on the product, so you huddle back into your own structure and you keep working on the product because you have a delivery to bring about. It takes you a while to open up to other interfaces and figure out how to manage or use the right leverage in this huge machine to get what you want. It takes you about a year, and after a year you are fully integrated.”57

While the development team was largely left autonomous, other functions within the target were typically absorbed much faster (see Exhibit 1 for a chart on organisational integration58):

“You (the target) start bringing people from other groups instead of recruiting outside, and your manufacturing that you used to keep very close to you now joins the general manufacturing of Cisco, sales joins the general sales, marketing has some parts in other BUs as well because it’s combined with other things. So you

53 Mayer D, Kenney M. 2004. Economic action does not take place in a vacuum: understanding Cisco’s

acquisition and development strategy. Industry and Innovation 11(4): 299–325. 54 ibid. 55 Tempest N, Kasper C, Wheelwright S, Holloway C. 2000. Cisco Systems, Inc.: Acquisition integration for

manufacturing. Harvard Business School, Case No. 9-600-015, February 15. 56 Interview on February 24, 2009. 57 Interview on March 2, 2009. 58 Yemen G, Chatterjee S, Bourgeois LJ. 2003. Cisco: Early If Not Elegant (A). Darden Business School,

Case No. UVA-BP-0446.


start losing [your independent identity] and you start bringing other components in, it becomes like any other group in Cisco.”59

The key to generating a high return on investment was to quickly and effectively leverage Cisco’s access to customers to sell the acquired company’s products, as Chambers noted:

“The way we measure the success of small-to-medium-size acquisitions is straightforward. Within three years, we would like to generate in revenue what we paid for the company. If we do that, then the acquisition was a good, solid base hit. If we do more than that – say we do it in two years or even in one year – then the acquisition was a home run or a grand slam. Crescendo was a grand slam.”60

Underpinning Cisco’s unique acquisition strategy was a deep “ecosystem involvement”.61 Cisco’s executives were also investors and members of boards of directors of startups and venture capital firms in the ecosystem in which Cisco operated.62 This gave it an information advantage which was difficult for its larger competitors to reproduce, as it required executives who had experienced the startup process first-hand and were deeply involved in the startup culture.63 Indeed, some years before, a study had identified within Cisco’s ranks 35 vice presidents (or higher) recruited through acquisitions, while Lucent, one of its major competitors, and a multiple acquirer in the late 1990s, did not employ a single person with start-up experience among its 20 top executives.64

During the 1990s, Cisco continuously stepped up its acquisition pace to keep ahead of its rivals, fill the gaps in its product line, and enable it to provide a one-stop networking shop to its customers.65 From one acquisition in 1993 and three in 1994, Cisco increased the pace of deals to complete ten acquisitions in 1995 and 1996, the largest of which was that of StrataCom, Inc. (See Exhibit 2 for a list of Cisco’s acquisitions).

StrataCom was a public firm with more than a 1,000 employees, acquired in April 1996 for about $5 billion.66 It was a leading supplier of ATM (with 40% market share) and Frame Relay (22% market share) WAN – Wide Area Network – switching equipment, which could handle voice, data and video.67 StrataCom was regarded as highly attractive to Cisco for both its technological as well as marketing capabilities. On the one hand, Cisco was eager to complement its portfolio with Frame Relay switching products, which were being rapidly adopted by telecommunications companies. On the other, it was also interested in StrataCom’s marketing clout, i.e., its close relationships with the regional Bell holding

59 Interview on March 2, 2009. 60 Rifkin G. (1997). Growth by acquisition: the case of Cisco Systems. Strategy and Business. Booz Allen and


acquisition and development strategy. Industry and Innovation 11(4): 299–325. 62 ibid. 63 ibid. 64 ibid. 65 http://www.fundinguniverse.com/company-histories/Cisco-Systems-Inc-Company-History.html 66 Mayer D, Kenney M. 2004. Economic action does not take place in a vacuum: understanding Cisco’s

acquisition and development strategy. Industry and Innovation 11(4): 299–325. 67 Bunnell, D. (2000). Making the Cisco Connection, John Wiley & Sons, New York.


companies.68 The deal was thus seen as critical for Cisco in attempting to move beyond its core enterprise segment into the area of telecommunications access providers currently served by entrenched and formidable competitors such as Alcatel, Lucent Technologies Inc., and Nortel Networks Corporation.69

Cisco promised the employees of StrataCom that there would be no layoffs and named StrataCom’s CEO Richard (Dick) Moley senior vice president and general manager of the newly created WAN business unit.70 Cisco planned to integrate StrataCom’s products with its IOS (Internetwork Operating System), and import StrataCom’s traffic and quality-of-service software into its own routers and switches.71 On the face of it, the two appeared to be combined after only 90 days, a record-breaking speed. However, Morgridge later admitted that it was difficult to integrate both the technology and the marketing sides, and that integration took longer than the 90 days initially touted:

"It took a lot longer to assimilate StrataCom, a lot of technology our field force had to learn. They were right next to us and we did a great job in integrating manufacturing, services, purchasing.”72

Other problems resulting from the acquisition started surfacing.73 To reassure its existing customers, Cisco initially denied that there was overlap between Cisco’s current ATM offering (resulting from the 2004 LightStream acquisition) and StrataCom’s product line. But a few months after the StrataCom acquisition Cisco discontinued the LightStream product line.74 This not only upset existing customers but also demoted the Cisco employees of the division developing these products. Another difficulty arose from the mismatch between Cisco and StrataCom’s sales compensation schemes. This prompted the departure of several members of the StrataCom’s sales team, who were joined by Moley. While some outsiders believed that the main problem with StrataCom was that Cisco was purchasing a firm embedded in a different market that it did not fully understand,75 Morgridge highlighted the learning benefits from this experience:

"[It] was good because we gained insight on the unique challenges of doing a big deal versus a small one. We felt pretty good with the small deals. Whenever you feel like that, you better watch out.”76

Cisco continued its blistering acquisitions pace in 1997 and 1998, announcing 14 more deals77 in an attempt to secure technology and scarce intellectual assets.78 During 1999 it became

68 ibid. 69 http://www.fundinguniverse.com/company-histories/Cisco-Systems-Inc-Company-History.html 70 Bunnell, D. (2000). Making the Cisco Connection, John Wiley & Sons, New York. 71 ibid. 72 Mayer D, Kenney M. 2004. Economic action does not take place in a vacuum: understanding Cisco’s

acquisition and development strategy. Industry and Innovation 11(4): 299–325. 73 Bunnell, D. (2000). Making the Cisco Connection, John Wiley & Sons, New York. 74 ibid. 75 Mayer D, Kenney M. 2004. Economic action does not take place in a vacuum: understanding Cisco’s

acquisition and development strategy. Industry and Innovation 11(4): 299–325. 76 Bunnell, D. (2000). Making the Cisco Connection, John Wiley & Sons, New York. 77 http://www.fundinguniverse.com/company-histories/Cisco-Systems-Inc-Company-History.html


even more acquisitive, snapping up 18 companies and gaining a presence in two emerging areas: fibre-optic networking and wireless networking (See Exhibit 3 for Cisco key financials during the 1990s). In the frenzied bull market of high-tech stocks, Cisco found itself by early 2000 with a market value above $450 billion, making it the third most valuable company in the world, behind Microsoft and General Electric.79 For a brief period in late March of 2000, Cisco even ranked as the most valuable company in the world, with a total market capitalisation of $555 billion. Rather than slowing it down, Chambers planned to increase the company’s acquisition pace, with the addition of as many as 24 companies during 2000.

Cisco’s Strategy in the New Millennium

The aggressive acquisitive expansion was not trouble free, however. Some of the acquisitions undertaken in 1999-2000 failed to create value for Cisco. For example, Pirelli Optical Systems, acquired in December 1999 for $2.15 billion, represented a significant deviation from Chambers’ principles.80 Headquartered in Italy, it was distant not only in geographic but also in cultural terms. Its organisation proved to be very hierarchical and decision-making was far slower than at Cisco. Finally, it was not a market leader in its domain. Though Cisco would not confirm the success or failure of the acquisition, in mid 2001 the press reported that the Pirelli acquisition had been unsuccessful.81 While the market in which Pirelli operated doubled in size between 1999 and early 2000, Pirelli’s own market share was reported to have dropped from 5% to 1% over the same period.82 In addition, by May 2001 Cisco confirmed that five other acquisitions had failed to deliver value and had to be written off: Monterey Networks, Clarity Networks, HyNEX, Maxcomm Technologies and Amteva.83

Several explanations have been posited as to why these acquisitions failed.84 First, it was estimated that the dramatic acceleration in the pace of acquisitions from 1998 to 2000 overloaded Cisco’s ability to undertake adequate due diligence. A second possible explanation was that prior to 1997, with nearly all acquisitions made in emerging markets, Cisco faced no entrenched competitors and thus leveraged its complementary assets to occupy new market niches; then, as Cisco started entering segments with established competitors, this advantage disappeared. Third, some of the new technological domains, such as optics and wireless technologies, required other capabilities than Cisco’s competencies, revolving around networking-related hardware and software. Finally, as Chambers explained, during the telecommunications bubble, stock values were increasing so quickly that Cisco had to acquire firms that had not yet shipped a product, adding another dimension of uncertainty to whether the product would actually come to fruition or not.85

78 Tempest N, Kasper C, Wheelwright S, Holloway C. 2000. Cisco Systems, Inc.: Acquisition integration for

manufacturing. Harvard Business School, Case No. 9-600-015, February 15. 79 http://www.fundinguniverse.com/company-histories/Cisco-Systems-Inc-Company-History.html 80 Mayer D, Kenney M. 2004. Economic action does not take place in a vacuum: understanding Cisco’s

acquisition and development strategy. Industry and Innovation 11(4): 299–325. 81 ibid. 82 Paulson E. 2001. Inside Cisco: the real story of sustained M&A growth. John Wiley & Sons, New York. 83 Mayer D, Kenney M. 2004. Economic action does not take place in a vacuum: understanding Cisco’s

acquisition and development strategy. Industry and Innovation 11(4): 299–325. 84 ibid. 85 ibid.


The burst of the internet bubble in 2000 and the resulting telecommunications industry slowdown in 2001 took Cisco by surprise. For the first time in its history, the company found it difficult to grow its revenue base.86 (See Exhibit 4 for Cisco key financials after 2000). On April 16, 2001, Cisco announced lay-offs of 8,500 employees, nearly one-fifth of its payroll,87 and a drop of 30% in revenues for the third quarter.88 Chambers referred to this period as “a 100-year flood scenario”.89 He decided to change Cisco’s expansion orientation, which had led to the acquisition of 73 companies between 1993 and 2000, replacing it with discipline, order and restraint. The differences between the old and new approach were described by the Wall Street Journal:

“The old Cisco stressed increased revenue; the new Cisco demands profits. The old Cisco favoured speed and internal competition; the new Cisco emphasises deliberation and teamwork. The old Cisco devoured start-ups and raced to build niche products; the new Cisco wants to create fewer, more-versatile products internally. The old Cisco tried to do everything; the new Cisco is trying to figure out what not to do.”90

Indeed, it was time for Cisco to tackle some of its major problems. One of these was the duplication of development efforts across the different segments, resulting in competition on the same customer accounts between different Cisco teams. One of Cisco’s executives at the time recalled:

“Cisco used to be a great company for entrepreneurs. You got a lot of freedom; even if you were competing with the other business units within Cisco, so be it. But this was before 2000. Everything changed in 2000. If you think about it, the company was developing competing products, but the market was exploding and was growing so fast… There was a router, for example, that was developed for the service provider market and [another one] for the enterprise market. The features of these routers were extremely similar. There was no need to have two routers. But Cisco was so successful in this and in that, that nobody bothered to ask: Why are we doing that? I can tell you, for example, I was in two meetings with customers where the customer came and said: ‘You know, I already made a decision that I will buy Cisco. There is this product that you are trying to sell to me and there is that product. Why don’t both of you go outside the room, make a decision what it is that we should buy, come back to us, and we will buy whatever you decide.’ It reached that point.”91

86 Bhaskar, R. (2004). A Customer Relationship Management System to Target Customers at Cisco, Journal

of Electronic Commerce in Organizations, 2 (4), 63-73. 87 http://www.answers.com/topic/cisco 88 Bhaskar, R. (2004). A Customer Relationship Management System to Target Customers at Cisco, Journal

of Electronic Commerce in Organizations, 2 (4), 63-73. 89 Chatman, J., O’Reilly, C., & Chang, V. (2005). Cisco Systems: Developing a human capital strategy,

California Management Review, 47(2): 137-167. 90 Thurm, S. (2003). After the boom, Cisco is learning to go slow. The Wall Street Journal, May 6. 91 Interview on February 24, 2009.


Chambers confessed that Cisco should

“eliminate the problem of having separate teams working on similar products or ideas. That, in turn, would help the company pitch a broad range of products to customers. The customers were the ones saying: Your products are overlapping. We’d like to see a better roadmap.”92

These duplications stemmed from Cisco’s previous reorganisation by customer segment rather than by technology. To eliminate them, it was decided to re-consolidate the engineering group. In August 2001, Chambers announced a major organisational restructuring that would transform Cisco from a decentralised operation focused on specific customer groups to a centralised one focused on technology. As Bill Jennings, a chip designer at Cisco, put it: “We’ve rationalised the sins of the past seven years.”93 Although Chambers understood that a centralised, functional structure was necessary to avoid product and resource redundancies, he also realised that it risked making the company less customer-focused.94

Cisco’s year-on-year average sales growth of about 80% during the 1990s slowed to around 15% after 2000. The slowdown in its core markets of switching and routing forced Cisco to seek new revenue streams by entering entirely new markets, such as consumer networking, online video and web conferencing.95 The traditional acquisitions approach, focused on product-development, was not suitable for entering new markets. According to Ned Hooper, Cisco’s head of Corporate Development, the move towards diversification required Cisco to adapt its acquisition strategy:

“We can’t buy a company and tell it to do as we see fit if we don’t have a true understanding of the marketplace.”96

While continuing the traditional acquisition approach in its core markets, acquiring 44 companies for an aggregate sum of about $2.5 billion over five years, Cisco spent more than four times as much – $11 billion – on a mere handful of new-style acquisitions which it called “platform” deals.

Cisco began experimenting with the new approach in 2003, when it spent $500 million to acquire Linksys Group Inc., a company which made home-networking equipment allowing several personal computers to share files and an internet connection.97 Cisco realised that only a large acquisition could serve as a platform for entering this new market. Moreover, Cisco’s networking gear cost as much as $100,000, while Linksys’s consumer products started at less than $100 and sold through retailers, with which Cisco had little experience. Therefore, to

92 Mayer D, Kenney M. 2004. Economic action does not take place in a vacuum: understanding Cisco’s

acquisition and development strategy. Industry and Innovation 11(4): 299–325. 93 Chatman, J., O’Reilly, C., & Chang, V. (2005). Cisco Systems: Developing a human capital strategy,

California Management Review, 47(2): 137-167. 94 Gulati, R. (2009). "Cisco Business Councils: Unifying a Functional Enterprise with an Internal Governance

System." Harvard Business School Case 409-062. 95 White, B. & Vara, V. (2008). Cisco changes tack in takeover game. The Wall Street Journal, 17 April,

p. A.1. 96 ibid. 97 ibid.


avoid inadvertently damaging the newly acquired company, Cisco decided to keep in place the Linksys brand name, manufacturing agreements and its sales team.98

Three years later, Cisco used the same hands-off approach in its 2006 acquisition of set-top box manufacturer Scientific-Atlanta Inc., with more than 7,500 employees, for an enterprise value of about $6.9 billion. In this acquisition, it relaxed not only its size preference but also diverged from the rule of favouring target companies within 20 miles of its headquarters, as Scientific-Atlanta was based in Lawrenceville, Georgia.

Observers noticed that as Cisco diverged further from its traditional domains, it would start facing the integration difficulties it had managed to avoid with its previous acquisition framework. The slow pace of integration of the “platform acquisitions” suggested that they were not as easy to integrate. Instead of the typical two months to integrate companies, Cisco devoted 18 months to two years on less familiar businesses.99 For example, Cisco planned to take a year and a half learning Scientific-Atlanta’s business before sitting down with its executives to discuss detailed sales synergies.

The IronPort Acquisition

Cisco had been the clear leader in the network security market since 2002.100 By 2006, security was one of Cisco’s six advanced technologies, bringing in revenues of $2 billion per year, accounting for about 40% of the total network security market, estimated at $5 billion that year. Cisco had 1,500 engineers developing security products such as VPN, firewall, intrusion-prevention and intrusion-detection systems (IPS/IDS), with several hundred additional engineers across its various infrastructure product lines integrating security features into network gear. 101

Although its security products were not considered the best-performing nor the most cost-efficient, Cisco successfully leveraged its pervasiveness in corporate networks102 to leave its main competitors, Juniper and Check Point, far behind, and become a leader in worldwide sales and shipments for the major security product categories.103 Nevertheless, Cisco’s position was far weaker than in its core routing and switching markets, where for many years it had held a 70% to 80% market share. Moreover, it had significant gaps in its security product offerings. To complement its capabilities, it had acquired several small companies104 including Okena, Twingo Systems, Riverhead Networks, Perfigo, Protego Networks, FineGround Networks, NetSift and others. One industry observer commented:

98 White, B. & Vara, V. (2008). Cisco changes tack in takeover game. The Wall Street Journal, 17 April,

p. A.1. 99 ibid. 100 http://www.networkworld.com/community/node/43404 101 Hochmuth, P. (2006). Cisco looks to grab broader security role. Network World. 2 June. Download from:

http://www.networkworld.com/news/2006/020606-cisco-security.html 102 http://www.baselinemag.com/c/a/Projects-Security/Cisco-Security-That-Old-Familiar-Face/. 103 Hochmuth, P. (2006). Cisco looks to grab broader security role. Network World. 2 June. Download from:

http://www.networkworld.com/news/2006/020606-cisco-security.html 104 Rendon, J. (2004). Cisco defends NAC security strategy. SearchNetworking.com, 5 August. Downloaded

from: http://searchnetworking.techtarget.com/news/interview/0,289202,sid7_gci998503,00.html


“Cisco has helped lead a trend in the security industry in which large firms swallow up smaller ones in an effort to broaden their menu of products and services under the overall network security umbrella. The theory is that customers would rather buy multiple solutions – firewalls, antivirus, VPNs, etc. – from a single vendor that it trusts rather than dealing with the hassle of having a vendor and a service contract for each one.”105

But the one-stop-shop was not the only argument. Whereas most security firms were point products protecting the network from the outside, Cisco’s emphasis was on integrating security across its portfolio of networking products.106 The processing power of these products provided strong filtering capabilities, which lent themselves naturally to performing security tasks. Richard Palmer explained Cisco’s Self-Defending Network strategy to provide customers with integrated end-to-end IT security:

“In the past, our networks were like M&Ms: hard on the outside and soft and chewy on the inside... [Now, we try to] make the networks hardened all the way through, like jaw-breakers.”107

IronPort had appeared on Cisco’s radar screen in 2005, when Palmer made a list of dominant security companies that might become acquisition targets. IronPort, based in San Bruno, California, which then had about 350 employees, featured on the top of that list.108 IronPort CEO Scott Weiss had co-founded it in 2000, following a high-powered career in which he had consulted at McKinsey & Co, served as a group manager at EDS, led a business development team at Microsoft (after its acquisition of Hotmail) and was managing director and entrepreneur-in-residence at Idealab.

Launched as a business dedicated exclusively to combating email-borne spam, IronPort had built its technology around an advanced operating system and reputation monitoring network, which became the cornerstones of its high-capacity gateway security appliances. Over the years, it had expanded its powerful anti-spam capabilities to provide anti-spyware, data encryption and compliance services, as well as content inspection for web traffic. Like Cisco, which viewed the network as its platform, IronPort saw itself, on a much smaller scale, as a platform in the security space. It had used external growth to leverage its platform, acquiring PostX, an encryption service provider, to help seamlessly deliver secure, reliable email content protection to any mailbox type, regardless of the email software used. In addition, it entered into a partnership with Webroot to bolster spyware detection by adding the company’s premium software into IronPort’s latest web security appliances. 109

IronPort’s successful and highly advanced product portfolio relied on two technological foundations.110 The first was IronPort AsyncOS, a revolutionary operating system delivering the industry’s highest performance and best security features, while saving money on 105 Regan, K. (2004). Cisco To Buy Protego Networks in $65 Million Deal. E-Commerce Times. 20

December. Download from: http://www.ecommercetimes.com/story/39129.html?wlc=1264462865 106 http://www.lightreading.com/document.asp?doc_id=11904 107 ibid. 108 ibid. 109 Gargaro, P. (2007). Cisco and IronPort: A promising horizon on a threatening landscape. The Web Security

Report. July. 110 ibid.


hardware, rack space, power and IT administration time. The second was SenderBase, the world’s largest email and web traffic monitoring network, used to differentiate legitimate senders from spammers and other attackers. With data on more than 25% of the world’s internet traffic, IronPort’s SenderBase Network afforded an unprecedented real-time view into global security threats. SenderBase was at the heart of IronPort Reputation Filters and the SenderBase Reputation Score (SBRS), which translated SenderBase data into a single score indicating the threat level for each incoming message and URL. SenderBase was also utilized by IronPort Virus Outbreak Filters to protect customers from viruses hours before traditional anti-virus vendors would publish virus signatures. These foundations were highly leverageable. The acquisition of IronPort would pave the way for the fusion of IronPort’s proven security solutions with Cisco’s own vast network infrastructure at a time when battle against email and web-based threats was reported to be intensifying. A deal between the two companies would combine IronPort’s industry-leading content security applications and its SenderBase (the world’s first and largest email and web traffic monitoring service) with Cisco’s broad array of network infrastructure and security products.111

When Scott Weiss first heard that Cisco might be interested in acquiring his startup, he fired off a reassuring email to his staff: “Said acquiree will not be us.”112 Consequently, in early 2006, when Cisco made its first offer of $400 million, Weiss declined,113 fearing he would lose control over his firm. He also believed that IronPort was worth $1.5 billion given its leadership and growth prospects. IronPort had built its organization to sustain independent growth. In the past three years, Weiss had strengthened his sales and marketing team with high-profile executives such as Jeff Williams, from IntruVert Networks (acquired by Network Associates Incorporated), and Shrey Bhatia, formerly with Veritas Software114 (later acquired by Symantec115), complementing IronPort’s already strong product development group. As Weiss put it at the time:

“When a sales team as strong as this has a product as strong as the IronPort C60 – the results can be astounding… The IronPort C60 is designed from the ground up to meet the needs of the Global 2000. This team will bring it to them.”116

These efforts had paid off. Over the next three years, IronPort had opened 12 offices and accumulated over 500 customers in Asia alone. If Cisco was to integrate IronPort, it would impact not only IronPort’s internal organisation but also its 500 channel partners worldwide, including 150 partners in North America alone.117 One such partner, Tim Hebert, CEO of Atrion Networking, based in Warwick, Rhode Island, disclosed that it enjoyed average product margins of 20% to 22% on IronPort’s product line, in addition to recurring license 111 Gargaro, P. (2007). Cisco and IronPort: A promising horizon on a threatening landscape. The Web Security

Report. July. 112 ibid. 113 ibid. 114 http://www.ironport.com/pdf/ironport_2003-07-21b.pdf 115 http://www.ebmm.org/Fusion_Pleasanton/IndianExpress_FusionPleasanton_12Jan07.pdf 116 http://www.ironport.com/pdf/ironport_2003-07-21b.pdf 117 Hagendorf Follett, J. (2007). Cisco Gets The Message With $830M E-Mail Security Acquisition.

ChannelWeb, 4 Jan, http://www.crn.com/security/196800933;jsessionid=DL2OXYG2RW4KNQE1GHOSKHWATMY32JVN


revenues and high service revenue opportunities.118 While admitting that the Cisco name could give channel partners a leg-up against IronPort competitors such as Proofpoint, Secure Computing, and Barracuda Networks,119 he acknowledged that the transition to Cisco’s channel partner might take time:

“You’re not going to immediately see the field flooded with 3,000 North American partners selling IronPort without investing in it.”120

Palmer knew he had to be very careful in the promises he would make to IronPort’s sales force. It was critical to keep sales momentum in this fast-growing market and the deal could not go forward without their support. IronPort’s sales people were better paid than their counterparts at Cisco and were convinced that being integrated into Cisco’s sales function would hurt sales and their individual compensation. A former Cisco executive, who had sold his firm to Cisco some years earlier, explained the risks involved in handing over the channels to Cisco:121

“The minute you get acquired, the channels go away and it’s like a nose dive. The channels go away because either they have a conflict with Cisco or Cisco has a conflict with them… when there’s no conflict, then you rank in the channel hierarchy for Cisco based on how much Cisco gear you move. A lot of our channels didn’t move much Cisco gear. They were great for us, but from the Cisco perspective they ranked low, and if they rank low then the discounts they get are pretty bad, and suddenly they have no more interest to go sell. Pretty much overnight the channels go away and you start this nose dive. And you’re sitting on this huge engine, the Cisco sales force, and you have to ignite it before you hit the ground. A lot of start-ups then aren’t able to get that engine going.”

As he gathered his thoughts on the deal on the day before Christmas Eve, Richard Palmer knew that this unique opportunity could be missed. IronPort had the right profile to successfully go through an IPO. Against a backdrop of so many struggling startups since the dotcom bubble had burst, IronPort stood out as a success story. It had managed not only to develop an attractive range of products helping protect email traffic from spam, viruses and hacking, but had also succeeded in marketing them to an impressive clientele. Although IronPort was not yet profitable, it was growing fast, with year-on-year sales almost doubling between 2005 and 2006, and bookings up nearly 70% during the same period.122

118 Hagendorf Follett, J. (2007). Cisco Gets The Message With $830M E-Mail Security Acquisition.

ChannelWeb, 4 Jan, http://www.crn.com/security/196800933;jsessionid=DL2OXYG2RW4KNQE1GHOSKHWATMY32JVN.

119 ibid. 120 ibid. 121 Interview on July 20, 2009. 122 White, B. & Vara, V. (2008). Cisco changes tack in takeover game. The Wall Street Journal, 17 April, p.

A.1.


Exhibit 1 Organisational Integration of Acquired Units


Exhibit 2 Cisco’s Acquisitions (1993-2007)

Target Name Date (month/year)

Total Net Transaction

Value ($ mm)

Number of

Employees

Primary industry

Tivella 12/2006 10 Systems Software Greenfield Networks 11/2006 60 Semiconductors Orative 10/2006 31 33 Application Software Arroyo Video Solutions 08/2006 92 44 Application Software Meetinghouse Data Communications

07/2006 44 77 Systems Software

Metreos 06/2006 28 19 Internet Software and Services

Audium 06/2006 20 26 Application Software SyPixx Networks 03/2006 51 27 Communications

Equipment Intellishield Alert Manager Assets from Cybertrust

11/2005 14 Internet Software and Services

Scientific-Atlanta 11/2005 6,900 7,500 Communications Equipment

Nemo Systems 09/2005 13 Semiconductors Sheer Networks 07/2005 97 100 Application Software Kiss Technology A/S 07/2005 61 65 Consumer Electronics NetSift 06/2005 30 15 Systems Software M. I. Secure 06/2005 13 Systems Software FineGround Networks 05/2005 70 42 Systems Software Vihana 05/2005 30 27 Semiconductors Sipura Technology 04/2005 68 Communications

Equipment Topspin Communications 04/2005 250 135 Communications

Equipment Airespace 01/2005 450 175 Communications

Equipment Protego Networks 12/2004 65 38 Communications

Equipment BCN Systems 12/2004 34 45 Systems Software Jahi Networks 11/2004 16 20 Communications

Equipment Perfigo 10/2004 74 Systems Software Dynamicsoft 09/2004 55 104 Systems Software NetSolve 09/2004 11 292 IT Consulting and Other

Services P-Cube 08/2004 200 118 IT Consulting and Other

Services Parc Technologies 07/2004 9 Systems Software Actona Technologies 06/2004 82 48 Internet Software and

Services Procket Networks 06/2004 89 Data Processing and

Outsourced Services Riverhead Networks 03/2004 39 44 Internet Software and

Services


Exhibit 2 (cont’d)



Value ($ mm)

Number of Employees

Primary industry

Twingo Systems 03/2004 5 Systems Software Latitude Communications 12/2003 80 183 Application Software Linksys Group 03/2003 500 308 Communications

Equipment SignalWorks 03/2003 14 Application Software Okena 01/2003 154 52 Application Software Psionic Software 10/2002 12 8 Systems Software Andiamo Systems 08/2002 750 270 Communications

Equipment AYR Networks 07/2002 113 30 Application Software Hammerhead Networks 05/2002 173 85 Application Software Hammerhead Networks 05/2002 173.00 85 Application Software Allegro Systems 07/2001 117.68 39 Systems Software AuroraNetics 07/2001 152.59 52 Communications

Equipment ExiO Communications 12/2000 155.00 Communications

Equipment Radiata 11/2000 295.00 53 Communications

Equipment Active Voice Corporation 11/2000 143.40 Communications

Equipment CAIS Software Solutions 10/2000 146.80 65 Construction and

Engineering Vovida Networks 09/2000 8,704.88 65 Application Software IPCell Technologies 09/2000 204.88 110 Application Software PixStream 08/2000 369.00 156 Communications

Equipment IPmobile 08/2000 345.53 81 Application Software NuSpeed Internet Systems 07/2000 470.29 56 Communications

Equipment Komodo Technology 07/2000 159.77 25 Communications

Equipment Liberate Technologies 07/2000 100.00 414 Application Software Netiverse 07/2000 210.00 34 Internet Software and

Services HyNEX 06/2000 7,471.75 Communications

Equipment Qeyton Systems AB 05/2000 800.00 52 Communications

Equipment ArrowPoint Communications 05/2000 5,812.59 149 Communications

Equipment Seagull Semiconductor 04/2000 19.00 Semiconductors PentaCom 04/2000 118.00 48 Communications

Equipment SightPath 03/2000 800.00 76 Communications

Equipment InfoGear Technology Corp. 03/2000 293.55 74 Internet Software and

Services JetCell 03/2000 210.76 46 Telecommunications

Services





Value ($ mm)

Number of Employees

Primary industry

Atlantech Technologies 03/2000 180.00 110 Application Software Growth Networks 02/2000 431.08 53 Communications

Equipment Altiga Networks 01/2000 958.39 76 Internet Software and

Services Compatible Systems Corp. 01/2000 232.00 68 Communications

Equipment Pirelli Optical Systems 12/1999 2,760.63 701 Alternative Carriers Internet Engineering Group 12/1999 25.00 13 Application Software Worldwide Data Systems 12/1999 25.50 IT Consulting and Other

Services V-Bits 11/1999 128.00 30 Communications

Equipment Aironet Wireless Communications

11/1999 1,549.50 119 Computer Hardware

Tasmania Network Systems 10/1999 25.00 16 Internet Software and Services

WebLine Communications Corp.

09/1999 302.43 120 Internet Software and Services

Cocom A/S 09/1999 65.60 66 Communications Equipment

Cerent Corporation 08/1999 7,259.40 280 Communications Equipment

Monterey Networks 08/1999 515.18 100 Communications Equipment

MaxComm Technologies 08/1999 143.00 35 Alternative Carriers Calista 08/1999 55.00 20 Communications

Equipment StratumOne Communications 06/1999 432.72 78 Semiconductors TransMedia Communications 06/1999 936.11 66 Communications

Equipment Amteva Technologies 04/1999 170.00 144 Application Software GeoTel Communications 04/1999 2,220.22 310 Systems Software Sentient Networks 04/1999 256.17 102 Communications

Equipment Fibex Systems 04/1999 320.00 100 Communications

Equipment PipeLinks 12/1998 126.00 73 Communications

Equipment Selsius Systems 10/1998 145.00 51 Communications

Equipment Clarity Wireless Corporation 09/1998 157.00 39 Communications

Equipment American Internet Corporation

08/1998 53.32 50 Application Software

Summa Four 07/1998 152.59 210 Communications Equipment

CLASS Data Systems 05/1998 50.00 34 Internet Software and Services

Precept Software 03/1998 92.22 50 Application Software





Value ($ mm)

Number of Employees

Primary industry

NetSpeed 03/1998 256.60 140 Communications Equipment

WheelGroup Corporation 02/1998 121.49 75 Systems Software LightSpeed International 12/1997 192.00 70 Application Software Dagaz (Integrated Network Corporation)

07/1997 30 DSL Access Multiplexers

CAIS Internet 06/1997 156.00 40 Internet Software and Services

Global Internet Software Group

06/1997 20 Firewall Solutions

Skystone Systems Corp 06/1997 89.10 40 Semiconductors NetSys Technologies 10/1996 79.00 50 Office Services and

Supplies Granite Systems 09/1996 50 Gigabit Ethernet Solutions Nashoba Networks 08/1996 100.00 40 Communications

Equipment Telebit Corporation 07/1996 200.00 288 Communications

Equipment StrataCom 04/1996 4,997.03 1,000 Communications

Equipment TGV Software 01/1996 224.54 130 Systems Software Network Translation 10/1995 10 Internet firewall hardware

and software Grand Junction Networks 09/1995 85 Communications

Equipment Internet Junction 09/1995 10 Internet/Extranet

Enterprise Solutions Combinet 08/1995 141.75 100 Data Processing and

Outsourced Services LightStream Corporation 12/1994 60 Campus ATM Switching

Solutions Kalpana 10/1994 899.25 150 Communications

Equipment Newport Systems Solutions 07/1994 55 Internet Software and

Services Crescendo Communications 09/1993 94.50 60 Data Processing and

Outsourced Services


Exhibit 3 Cisco Financials in the 1990s

For the Year Ending

Jul-29- 1990

Jul-28-1991

Jul-26-1992

Jul-25-1993

Jul-31-1994

Jul-30-1995

Jul-28-1996

Jul-26-1997

Jul-25-1998

Jul-31- 1999

Total Revenue 69.8 183.2 339.6 649.0 1,334.4 2,232.7 4,096.0 6,452.0 8,489.0 12,173.0

Growth YoY NA 162.5% 85.4% 91.1% 105.6% 67.3% 83.5% 57.5% 31.6% 43.4%

Gross Profit 45.8 120.7 228.4 438.5 883.8 1,489.8 2,686.1 4,209.0 5,565.0 7,914.0

Margin % 65.7% 65.9% 67.2% 67.6% 66.2% 66.7% 65.6% 65.2% 65.6% 65.0%

EBITDA 22.4 69.2 136.1 277.2 536.5 868.7 1,533.4 2,351.0 2,993.0 3,833.0

Margin % 32.1% 37.8% 40.1% 42.7% 40.2% 38.9% 37.4% 36.4% 35.3% 31.5%

EBIT 21.4 66.2 129.4 263.6 500.2 793.7 1,400.8 2,137.0 2,664.0 3,344.0

Margin % 30.7% 36.1% 38.1% 40.6% 37.5% 35.6% 34.2% 33.1% 31.4% 27.5% Earnings from Cont. Ops.

13.9 43.2 84.4 172.0 323.0 456.5 913.3 1,051.0 1,331.0 2,023.0

Margin % 19.9% 23.6% 24.8% 26.5% 24.2% 20.4% 22.3% 16.3% 15.7% 16.6%

Net Income 13.9 43.2 84.4 172.0 323.0 456.5 913.3 1,051.0 1,331.0 2,023.0

Margin % 19.9% 23.6% 24.8% 26.5% 24.2% 20.4% 22.3% 16.3% 15.7% 16.6% Diluted EPS Excl. Extra Items³

0.003 0.01 0.018 0.037 0.06 0.08 0.153 0.168 0.2 0.286

Growth Over Prior Year NA 175.6 % 92.5 % 100.3% 62.5% 33% 91.8% 9.6%. 19% 43.3%


Exhibit 4 Cisco Financials after 2000

For the Year Ending Jul-29-2000A Jul-28-2001 Jul-27-2002 Jul-26-2003 Jul-31-2004 Jul-30-2005 Jul-29-2006

Total Revenue 18,928.0 22,293.0 18,915.0 18,878.0 22,045.0 24,801.0 28,484.0

Growth YoY 55.5% 17.8% (15.2%) (0.2%) 16.8% 12.5% 14.9%

Gross Profit 12,182.0 13,321.0 12,017.0 13,233.0 15,126.0 16,671.0 18,747.0

Margin % 64.4% 59.8% 63.5% 70.1% 68.6% 67.2% 65.8%

EBITDA 5,471.0 4,506.0 5,193.0 6,349.0 7,494.0 8,462.0 8,380.0

Margin % 28.9% 20.2% 27.5% 33.6% 34.0% 34.1% 29.4%

EBIT 4,608.0 2,270.0 3,236.0 4,886.0 6,295.0 7,442.0 7,156.0

Margin % 24.3% 10.2% 17.1% 25.9% 28.6% 30.0% 25.1%

Earnings from Cont. Ops. 2,668.0 (1,014.0) 1,893.0 3,578.0 4,968.0 5,741.0 5,580.0

Margin % 14.1% (4.5%) 10.0% 19.0% 22.5% 23.1% 19.6%

Net Income 2,668.0 (1,014.0) 1,893.0 3,578.0 4,968.0 5,741.0 5,580.0

Margin % 14.1% (4.5%) 10.0% 19.0% 22.5% 23.1% 19.6%

Diluted EPS Excl. Extra Items³ 0.359 (0.141) 0.254 0.495 0.704 0.868 0.89

Growth Over Prior Year 25.2% NM NM 94.9% 42.1% 23.3% 2.5%

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