Cisco Systems Inc. Case

INTRODUCTION

Cisco Systems was started by a team of husband and wife, Leonaid Bosack and Sandy J. Lerner in 1984. They developed the first specialized microcomputer that enable two or more networks communicate with each other by deciphering, translating and funnelling data between them. This microcomputer also called as "multi-protocol" router has opened up and boosted the functionality of the Internet world. Over the years, Cisco managed to become the spearhead in the data networking equipment market which saw the company provided and manufactured large-scale router that powered the Internet.

As Cisco Systems grow and expand over the years, so did the company's product portfolio. With routers and switches being the core products of the company, other products and services such as hubs, access products (connection for remote access), web scaling products and technologies, security products, InterWorks for SNA, IOS software and network management has slowly become a part of Cisco Systems product portfolio. This expansion of portfolio was made possible through the several acquisitions and partnerships. By 1998, Cisco managed to hold either number one or number two position in 14 of the 15 markets in which it competed. This has made Cisco the top choice among large companies to buy company's line of products and services. This situation may also reflect from the strong financial growth of Cisco. From 1994 until 1998 Cisco's total assets sky-rocketed from $1.1 billion to $8.9 billion. In just 8½ years, Cisco's market value managed to reach the $100 billion mark which beat the record of 11 years set by giant consortium of Microsoft. The contribution factors for Cisco's success were the bold, well-planned and creative strategy of the Cisco's management when structuring business strategic plan for the company, throughout the acquisition process and also during the integration process of acquired company into Cisco's system.

In July 1998, Cisco announced an agreement to acquire a systems company, Summa Four Inc. with the deal was expected to close sometime around November 1998. The integration process of Summa Four's systems into Cisco's systems may proved to be complex as Summa Four represented one of Cisco's largest acquisitions to date in terms of current revenues and employees. This acquisition may serve as a role model of potentially many more acquisitions to come in future.

BACKGROUND TO CASE STUDY

Cisco Systems Inc.

Cisco Systems Inc. was in the midst of acquisition process of Summa Four Inc., a systems company which developed and manufactured programmable switches used in the development of telephony applications. David Keller, Cisco's vice president of manufacturing, new product innovation, and technology is a person responsible to make sure a smooth and success acquisition process. Summa Four acquisition is the largest acquisition yet for Cisco. Summa Four Inc. has over 200 employees, one manufacturing plant in Manchester, $42 million in revenues and a full line of products being shipped. John Chambers (CEO from January 1995), John Morgridge (CEO from 1988 to 1995) and Ed Kozel (then Cisco's chief technology officer) had crafted a strategic plan for Cisco which consisted of four main components. The first component is for Cisco to assemble a broad product line in order to provide one-stop-shopping for networking solutions to customers. Second plan is to systematize the acquisition process. Define industry-wide software standards for networking equipment and pick the right strategic partners are the later plans for Cisco.

Cisco's core business strategy was using acquisition and partnership to acquire new technologies that are not part of Cisco's core products. Cisco believes that through acquisitions and partnerships, company can offer an end-to-end networking solution to customers and also shorten the time required on developing next-generation products. Cisco operated three manufacturing facilities which produce most of Cisco's core business. Cisco's manufacturing strategy was heavily dependent on outsourcing. This strategy not only enables Cisco to reduce the company overhead, but also able to make Cisco's people more focus on the intellectual portion and developing better processes. As Carl Redfield, senior vice president of manufacturing and logistics at Cisco said - "We supply the intellect; they supply the labour". Even though the external factories were not owned by Cisco, the company still did supply them with Cisco information systems and test systems to ensure that the outsource products will meet Cisco's quality standards and customer satisfaction.

Cisco regarded acquisitions as a means to secure scarce intellectual assets. The company measured the success of its acquisitions by three standards. Standard number one is by employee retention. Cisco went to great efforts to retain the employee of acquired company as they are the engineering staff that support the existing technology and will be the main factor when developing new best-of-breed technologies. Standard number two is by follow-on new product development. Acquired company must adopt Cisco's cross-functional, systematic new product introduction process in order to accelerate their new product development efforts. Standards number three is by return on investment for Cisco. Acquired company products will appear on Cisco's price list on the day the deal closed so that Cisco's sales force could immediately begin to sell the new products to customers hence generate high return in shorter period of time. The effectiveness of leveraging its distribution channels were reflected in the significant growth in Cisco's revenues and market value.

There were essentially four types of acquisitions: software companies, "pre-production" hardware, small hardware companies shipping product, and mature hardware companies. The complexity of the integration depends on the company's stage development. Cisco's can integrate the software and "pre-production" companies - as these are less complex, into their operations and set them up on their system right from the start. There also isn't a lot Cisco need to tweak or change. Cisco can have more influence and add more value on the manufacturing side.

Cisco had established a well-defined acquisition strategy and systematic approach to post-acquisition integration. Cisco will screened potential candidates against a well-defined set of criteria. These potential candidates were based on feedback from customers. Before agreeing the terms of an acquisition, Cisco conducted thorough due diligence on the company. Questions like "Would the product sell? Would

...