Dividends and Connecting the Dots Chapter 6 Guide to Successful Acquisitions

John Chambers joined Cisco in 1991, it had 400 employees and $70 million in revenues, when he left in 2015 after 20 years of being CEO, the company had $47 billion in revenues and Cisco is the backbone of the internet. Along the way, Cisco acquired 180 companies and beat out its competitors. How did he do it and can you learn something from Mr. Chambers? The answer to learning is yes and reading his book Connecting the Dots by Hachette books, NY, 2018 will help.

In Mr. Chambers time at Cisco, he signed off on over a 180 purchases most of them were successful, how did he do it? what processes did he use?

You have to start off why are you buying the company? In any deal, you have to understand the core asset you are buying and protect it. If the core asset is people, then measure the attrition rate. At Cisco the number was 5% and other companies the number reached 20%. Fortunately, Mr. Chambers recognized early on the most important success factor in any technology acquisition is retaining the founder and core leadership team.

In the technology field, many acquisitions are difficult and fail because a company is acquired for its people and what you hope they can do. It is a bet on leaders you do not know and market shifts that have yet to occur. Even if you get it right some acquisitions just do not work out. Cisco record was 1 in 3 did not meet their targets, but that was better than everyone else.

If the reason for acquiring to innovate or enter a new space, it is critical to be the leading player in the market. If you are not, it is time to leave the space and do something else. It is also important the price of any acquisition is not just its stand alone value, but also for its strategic and future value to you. An example is buying Crescendo at $90 million and it became a corner stone of a $13 billion a year business.

Culture is very important, the first step of Mr. Chambers playbook was once identifying companies that were attractive, to meet with the founders and leadership team. I wanted to listen to the leader’s vision for the company’s future. What he was looking for was the leadership team to be partners to reach the next level for their customers, employees and investors. The most important aspect is if you do not like what you hear, if it does not feel like a win for everyone be willing to walk away for it likely will not work.

One method Cisco used was called spin-in. These were startups we funded to allow a proven team to work outside of Cisco on breakthrough products that would be sold back to Cisco at a predetermined price, assuming they were successful. 3 examples turned out to multi billion dollar products.

The toughest part of an acquisition is deciding what to actually buy. The key to making better and faster decision is to follow a replicable process. It starts with 4 key principles (1) focus on acquisitions that let you enter or expand new markets that are in transition; (2) follow the lead of your customers: (3) unless you are intentionally buying a stand alone asset, immediately integrate what you buy into your architecture; and (4) maniacally ensure a match with your culture and values.

7 Golden Rules that guided Cisco in deciding what deals to pursue:

  1. Each Acquisition must align with your vision and strategy  – you and your target company must have a similar vision and strategy for how the industry will evolve regarding the focus are of the acquisition.
  2. Focus on market transitions and technology disruptions – disruptive technologies and shifting business models create opportunities for newcomers to gain market share.
  3. Listen to your customers in deciding which companies to acquire – getting reference from early innovative customers of the acquired company is a must before you make the decision.
  4. Create a win-win for both companies…their leaders, investors, employees and customers – understand what a win for the target company will be. As the process moves on, revisit the goals for both sides and ensure both sides see the process as a win-win. If you do not see win-win walk away.
  5.  Prioritize companies and technologies that fit with your portfolio – truly understand what it will take to integrate a product with your existing products. Cisco has a strong sales team which is an asset, but the real sustainable differentiation in the long run was the ability of their product to work with our other products to deliver customer results with speed, agility, limited risk.
  6. Look for a strong cultural match – the way to do this is ensure the culture of the acquiring company matches or is very comfortable with yours. If you do not trust the leaders, walk away, even though the opportunity looks sexy.
  7. Geographic proximity to your headquarters or key operational centers – remember unless they are a stand alone company, the idea is to integrate into your technology. If the company is a plane ride away, ensure a plan which has very frequent visitors to ensure the fit into the company.

Strategic Partnerships – Cisco’s guiding principles that increase the odds of success:

  1. The partnership must truly move the needle on both the top and bottom lines for each company and truly be strategic for both companies.
  2. Only strategically partner with companies that understand and are committed to strategic partnerships. Ask the company what other companies they have a relationship with which is successful.
  3. The strategic partnership must be accepted and driven by top management in both organizations. The people who will be executing the partnership must believe in what they are doing.
  4. Focus on 3 to 5 needle moving projects for both companies: it is unlikely all will be 50:50 it will be 30:70 or 40:60.

Mergers of equals in Technology.

They do not work and are good for the competitors. If you own the stock look for alternatives as Mr. Chambers in over 40 years only remembers one than worked out.

Linking to dividend paying stocks, in all investments how you narrow the field is the toughest choice. With dividend paying stocks, that takes away companies that do not pay dividends. Understanding how large technology companies see the world and look to change it, can help you in your investing. Mr. Chambers and Cisco has guiding principles and when to walk away, you can do the same.

There are more questions than answers, till the next time – to raising questions.

 

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