Profitable Growth by Acquisition 571approach that fights the tendency for managers to become emotionally at-
tached to a deal. In spite of the time pressures inherent in any merger transac-
tion, this is truly a situation where “haste makes waste.”
A common factor in each of these transactions—and one often overlooked
by managers and researchers in finance and accounting—is culture. Two types
of culture can come into play in an acquisition. One is corporate or industry
culture and the second is national culture, which is a factor in cross-border
deals. If the target is in a different industry than the bidder, a careful analysis
of the cultural differences between them is essential. Culture is especially
critical in industries where the main assets being acquired are expertise or in-
tellectual capital. Failure to successfully merge cultures in such industries can
be particularly problematic because key employees will depart for better work-
ing conditions. The attempted 1998 merger between Computer Associates
(CA) and Computer Science Corporation (CSC) ultimately failed when CA re-
alized that their mishandling of the negotiations and their insensitivity to the
culture at CSC would cause many of CSC’s consultants to quit the merged
company. We will discuss the keys to successful implementation of mergers
later in the chapter. In the next section we examine the acquisition strategy of
Cisco Systems Inc. We do this to make it clear that there are ways to increase
your chances of success when planning and implementing an M&A strategy.
ANATOMY OF A SUCCESSFUL ACQUIRER:
THE CASE OF CISCO SYSTEMS INC.
Cisco Systems Inc., the Silicon Valley-based networking giant, is one of the
world’s most successful corporations. Revenues for the fiscal year ending July
2000 were up an incredible 55% to $18.9 billion, while net income grew to $3.9
billion, resulting in a healthy 21% net profit margin. Even more impressive was
its 10th consecutive quarter ofacceleratingsales growth, culminating in a 61%
sales increase for the last quarter. At $356 billion, Cisco’s market capitalization
trailed only General Electric Company. What is behind such phenomenal results?
Beginning in 1993, Cisco has acquired 51 companies, 21 of them in the
12-month period ending March of 2000. Not every one of these deals has been
a winner, and certainly some elements of Cisco’s strategy are unique to the
high-technology industry. However, in a recent survey of corporate M&A poli-
cies Cisco was ranked number 1 in the world, and there are lessons for any po-
tential acquirer in its practices.^5
We will focus on two aspects of Cisco’s acquisition strategy: the compet-
itive and economic forces behind it and how new acquisitions are merged into
the corporate fold. The strategic imperative behind Cisco’s acquisition spree is
simple. Each year the company gets 30% to 50% of its revenue from products
that it did not sell 12 months before. Technological change means that Cisco
cannot internally develop all of the products its customers need. They have
two choices; to limit their offerings or to buy the products and technology they