572 Making Key Strategic Decisions
can’t or choose not to develop. In this case, the strategy is driven by their cus-
tomer ’s demands and by the realities of the industry. Once CEO John Cham-
bers and Cisco’s board made rapid growth a priority, an effective M&A plan
was the only way to accomplish this goal. To minimize risk, Cisco often begins
with a small investment to get a better look at a potential acquisition and to as-
sess it products, customers, and culture. Finally, Cisco often looks for private
and pre-IPO companies to avoid lengthy negotiations and publicity.
Cisco’s 1999 acquisition of fiber-optic equipment maker Cerent Corpora-
tion is a good example of this strategy. Cisco purchased a 9% stake in Cerent in
1998 as a hedge against what analysts viewed as Cisco’s lack of fiber-optic ex-
pertise. Through this small investment, Cisco CEO John Chambers got to
know Cerent’s top executive, Carl Russo. He quickly realized that they had
both come up through the high-tech ranks as equipment salesmen and had
built their companies around highly motivated and aggressive sales teams. Cer-
ent’s 266 employees included a 100-member sales team that had assembled a
rapidly growing customer base. Cerent also favored sparse offices—a Cisco
trademark—and Mr. Russo managed the company from an eight-foot square
cubicle. All of these factors gave Cisco important insights into Cerent’s
strengths and corporate culture.
When Mr. Chambers felt comfortable that Cerent could successfully be-
come part of Cisco, he personally negotiated the $7 billion purchase price for
the remaining 91% stake with Mr. Russo. The discussions took a total of two
and a half hours over three days. When the deal was announced on August 25,
1999, the second—and arguably the most important—phase of Cisco’s acquisi-
tion strategy kicked in. Over the years, including an occasional failure, Cisco
had developed a finely tuned implementation plan for new acquisitions. The
plan has three main pieces:
- Don’t forget the customer.
- Salespeople are critical.
- The small things garner loyalty.
There is often a customer backlash to merger announcements because
customers’ perception of products and brands may have changed. In the recent
spate of pharmaceutical industry mergers, only those firms that avoided pair-
ing up experienced substantial sales growth. As part of the external environ-
ment, customers are easy to ignore in the short term when the tendency is to
focus on the internal aspects of the implementation. This is a big mistake. To
allay customer fears, in the weeks after Cerent was acquired, Mr. Russo and his
top sales executive attended the annual Cisco sales convention meeting and
Mr. Chambers joined sales calls to several of Cerent’s main customers.
This lesson did not come cheaply. When Cisco acquired StrataCom in
1996, it immediately reduced the commission schedule of StrataCom’s sales
force and reassigned several key accounts to Cisco salespeople. Within a few
months, a third of StrataCom’s sales team had quit, sales fell drastically, and
Cisco had to scramble to retain customers. In the Cerent implementation, the