Cisco Changes Tack In Takeover Game
RE-ROUTED
By BOBBY WHITE and VAUHINI VARA
Wall Street Journal
April 17, 2008
When Scott Weiss heard that tech behemoth Cisco Systems Inc. wanted to acquire an
email-security company like his startup, he emailed a vow to his staff: "Said acquiree will
not be us."
Cisco was famous for fueling its stellar growth by buying dozens of companies and
digesting them completely, installing its own executives and leaving little trace of a
target's identity. The method made Cisco the envy of the technology world, where so
many acquisitions go awry. Mr. Weiss feared losing control of the firm he co-founded,
IronPort Systems Inc. When Cisco made an offer in early 2006, he declined.
Then last year, Mr. Weiss agreed to sell, for $830 million. His
convictions hadn't shifted. Cisco's had.
The Silicon Valley icon has been remaking its acquisition strategy
as it carefully tries to move into the 21st century's hot tech markets.
The company ultimately offered Mr. Weiss an un-Cisco-like
proposition: Cisco would buy IronPort, but let it operate as a standalone unit, with its own managers, brand name, engineers and
salespeople.
"They wanted to make sure they didn't screw it up," says Mr. Weiss.
This month, Cisco promoted Mr. Weiss, 42 years old, to head all of
its security-technology business.
Cisco's new focus mirrors the efforts of other large technology firms -- including
Microsoft Corp., Oracle Corp. and Sun Microsystems Inc. -- to avoid losing their status in
a new tech era in which growth is led by products powered by the Internet. Cisco's oncetorrid quarterly growth has slowed to around 15% year-to-year, from between 30% and
40% or more early this decade.
Cisco's strategy shift is particularly striking because the company, the
country's third-largest tech firm by market capitalization, is viewed as
a bellwether for the industry. Chief executive John Chambers wants
the networking giant to move beyond its core business -- making
gearlike switches and routers that direct computer and telecom traffic
over corporate networks. It's entering entirely new markets, such as
online video and Web conferencing.
That means adding new pages to Cisco's much-admired acquisition
playbook, which has been the subject of Harvard Business School
studies. "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," says Ned
Hooper, Cisco's head of business development, who is leading the new acquisition and
integration strategy.
Buying innovative small firms rather than developing new tech from scratch has long
helped Cisco stay in front of the pack with a fresh stream of new products, while largely
sidestepping the merger messes that peers often faced. The San Jose, Calif., company has
gobbled up 126 companies since its first acquisition in 1993, most of them small,
privately held and closely related to its networking-equipment business.
'Platform' Deals
But in the past five years, while spending about $2.5 billion on 44 companies in its core
business, Cisco has spent more than four times as much -- $11 billion -- on a handful of
new-style acquisitions that it calls "platform" deals. Instead of its typical two months to
integrate companies, Cisco plans to take 18 months to two years on more-unfamiliar
businesses.
Cisco has long followed a strict guideline for buying other companies, targeting small
businesses that establish early market leadership but are inexperienced in getting their
wares to customers. Cisco has nearly six dozen full-time staffers dedicated to
shepherding newcomers into the company. They make sure that within two months,
newly acquired employees get a new Cisco boss, a Cisco bonus plan and a Cisco health
plan. Salespeople are either laid off or folded into Cisco's own massive sales
organization, while top managers are offered two-year retention contracts to help ease the
transition. Acquired companies typically lose their brand names.
Cisco began experimenting with a new approach in 2003, when it shelled out $500
million to acquire Linksys Group Inc., which makes home-networking equipment that
allows multiple personal computers to share files and an Internet connection.
At the time, the most sophisticated Cisco networking gear cost more than $100,000,
while Linksys's consumer products started at less than $100. Linksys also sold its
products through retailers, with which Cisco had little experience. To avoid inadvertently
damaging the newly acquired company, Cisco has kept in place the Linksys brand name,
Linksys manufacturing agreements and its sales team.
Cisco used the same hands-off method when it bought set-top box manufacturer
Scientific-Atlanta Inc. in 2006 for $6.9 billion. While most of Cisco's acquirees are
within 20 miles of its Silicon Valley headquarters and have fewer than 300 employees,
Scientific-Atlanta was based in Lawrenceville, Ga., and had 7,600 employees.
To deal with the distance and size of the acquisition, Cisco tossed out its playbook, which
called for a single executive to manage the process. Instead, it parceled out different units
and departments among a tiny platoon of Cisco managers.
Last year, Cisco snapped up a 2,200-person online conferencing start-up, WebEx
Communications Inc., for $3.2 billion. Cisco allowed WebEx to keep its Santa Clara,
Calif., headquarters and left in place WebEx's sales team.
Market Leader
There are signs the new tack is working. Scientific-Atlanta contributed $2.76 billion, or
about 8%, to Cisco's 2007 revenue of $34.9 billion. The company doesn't break out
numbers for its Linksys or WebEx divisions, but Linksys remains a market leader with a
strong brand.
To be sure, as Cisco seeks farther-flung businesses, the company faces the possibility of
falling into integration morasses it had dodged. The slow pacing for some of the
"platform" integrations suggests they're not as easy. Cisco decided to take a year and a
half learning Scientific-Atlanta's business before sitting down with its executives to
discuss detailed sales synergies. Mr. Chambers last year said publicly that he would
phase out the Linksys name, but later recanted, saying Cisco's name hadn't made enough
inroads with consumers.
At IronPort, Mr. Weiss says some "us versus them" dynamics have lingered: IronPort
workers make fun of Cisco's long-winded job titles, while Cisco employees laugh at
IronPort titles like "spam cop deputy." And Mr. Weiss says he had hoped Cisco would
more quickly combine IronPort's security technology with its existing products -- but
there wasn't one person in charge of the effort, and employees weren't being rewarded
based on success at integration, he says.
New Regime
But many IronPort employees have settled into the new regime. Jed Lau, an IronPort
product manager who previously worked at Cisco, had once told colleagues he would
circle the outside of IronPort's headquarters naked if Cisco bought the company -- and he
did. But Mr. Lau found his job remained largely the same, and he continued to report to a
manager at IronPort, not Cisco. "I didn't know what to expect," says Mr. Lau. "But not
much has changed."
IronPort appeared on Cisco's radar screen in 2005. That year, Richard Palmer, then senior
vice president of Cisco's security technology group, made a list of dominant security
companies that might be acquisition targets. At the top of the list was IronPort, of San
Bruno, Calif., then with about 350 employees.
IronPort sells technology to protect email from spam, viruses and hacking, on a
subscription basis with updates and new features delivered frequently. It often negotiates
sales only after a customer tests the products. Cisco had little expertise in those
increasingly popular sales methods, offering its own security systems for an upfront sum
without extensive testing. IronPort wasn't profitable but it was growing fast, signing $125
million worth of deals in 2006, up nearly 70% from $74 million in 2005. UBS analyst
Nikos Theodosopoulos estimates that its sales roughly doubled in 2006 to $80 million.
IronPort Roadblock
By November 2005, Mr. Palmer began preparing to bid. But there was a roadblock:
IronPort's Mr. Weiss had long wanted to be CEO of a publicly traded firm. As a teenager
in Florida, Mr. Weiss had worked at his uncle's furniture store and dreamed of running
his own company. Later, after learning many CEOs attended Harvard Business School
and work as consultants at McKinsey & Co., he did the same.
Mr. Weiss wanted to take IronPort public. In early 2006, he hired a banker,
enthusiastically told his staff about the initial-public-offering plan and began listening in
on analyst calls by CEOs of public companies, like Hewlett-Packard Co.'s Mark Hurd.
When Mr. Palmer and other Cisco executives approached him around February 2006
with an informal overture to buy IronPort for $300 million to $400 million, Mr. Weiss
turned them down. He thought IronPort was worth $1.5 billion based on its market
leadership and growth, and he didn't want it swallowed up by the giant Cisco machine.
Talks broke down over price. But in July, software-security firm Secure Computing
Corp. agreed to buy IronPort rival CipherTrust for $274 million, suggesting IronPort
might not be worth as much as Mr. Weiss thought. "That was a reality check," he says.
While he continued his IPO plans, Mr. Weiss's financial advisers urged IronPort's board
to consider safer options such as a sale.
In October 2006, Mr. Weiss reignited talks with Cisco. At a meeting at IronPort with
Messrs. Hooper and Palmer, he was told for the first time that IronPort could remain an
independent business within Cisco. The approach surprised Mr. Weiss, and -- along with
a bumped-up price -- won him over. During the Christmas holidays, he agreed to sell.
A 12-person Cisco team began working on integration plans. Graeme Wood, who
oversees acquisition and integration for Cisco's business-development group, split efforts
into two tracks. Employees in nonsales areas such as marketing, product development
and finance would be integrated within a month. But Mr. Wood figured Cisco should take
up to two years to fully integrate IronPort's sales team, in order to give more time to
study IronPort's subscription-based sales model.
On Jan. 3, 2007, Mr. Weiss held a staff meeting on the vacant third floor of IronPort's
headquarters, announced the sale and introduced Mr. Palmer and other senior Cisco
executives. Many employees, who considered Cisco a competitor, reacted negatively.
"Everyone was excited about being an independent company," says Nick Edwards, a
product manager. Mr. Edwards worried he would have to move to Cisco's San Jose
headquarters, adding an hour a day to his commute from home in Oakland, Calif.
But during the staff meeting, it became clear Cisco planned to use a light touch. Cisco
executives said they planned to let IronPort keep its San Bruno office. They also said
Cisco would retain all 175 IronPort salespeople in a stand-alone group for at least 18
months after the deal closed. That helped win over Christina Foley, a sales manager who
had worked at IronPort for three years. Within weeks, she also was offered a higher
salary and a retention bonus for staying. "I was excited," Ms. Foley says. She declined to
disclose the size of the salary increase and bonus.
Cisco officials brought Tshirts emblazoned with the
company logo to the January
meeting, but Mr. Weiss and
his human-resources head,
Anna Binder, persuaded them
to leave the shirts aside for a
while to avoid antagonizing
the staff. A few days later, the
Cisco shirts reappeared, but
Mr. Weiss and his cohorts had
added wording to the back:
"IronPort: Expensive but
strategic," a quote from
Merrill Lynch about the deal.
The new owners didn't gripe
about the alteration.
Cisco didn't abandon all of its old integration practices. Within weeks after the sale
closed in June 2007, Mr. Wood handed out new compensation packages, benefits and
titles to IronPort's nonsales employees. Sales employees kept their old compensation
packages and titles but got Cisco benefits. All employees received Cisco badges -- though
they also got to keep IronPort badges to enter their own building. He also dispatched
Cisco's information-technology staff to wire IronPort's offices for access to Cisco's
intranet, to quickly immerse new employees in the giant company's culture. But he let
IronPort express its independence in some ways, like with the business cards that still
prominently display the IronPort name and logo. "IronPort is now part of Cisco" appears
only in tiny letters in a corner.
'Thumbs Up'
Mr. Edwards, the product manager, says he's found it easier to sell customers on the
quality of IronPort products with a Cisco stamp of approval. "In the early days, you'd call
a customer, and it was like, 'Iron-who?'" he says. Now the reaction is "more along the
lines of, 'Thumbs up, let's move forward,'" he says.
Mr. Weiss, who stayed on with Cisco, says Cisco has followed through on its promises
about IronPort's independence. Late in 2007, Mr. Weiss sat down with Mr. Palmer to
hash out ways for IronPort to tap Cisco's huge budget without getting lost in the Cisco
machine. Linksys co-founders Victor and Janie Tsao say they enjoyed the same treatment
after joining Cisco.
In the 15 months since the deal was announced, IronPort's staff has grown to about 700
from 400 and IronPort's bookings doubled last year to $246 million, which is meeting
Cisco's expectations, the company says.
Earlier this month, Cisco promoted Mr. Weiss to head of the company's security
business, replacing Mr. Palmer, who has taken another job at Cisco. Mr. Weiss has 1,275
people reporting to him. In his new role, Mr. Weiss will decide whether -- and how -- to
integrate IronPort's engineers and sales force into Cisco, but says he hasn't made any
decisions yet. He doesn't plan any layoffs.
Write to Bobby White at bobby.white@wsj.com and Vauhini Vara at
vauhini.vara@wsj.com