By Cristian Anastasiu, Excendio Advisors
What role should a customer’s input play in determining a company’s M&A strategy? A key one, as the following story about Cisco’s first of more than 220 acquisitions suggests…Cisco’s first purchase on its storied M&A binge had an unlikely matchmaker: a customer!
In the early 90’s, Cisco was a one product company – routers, a technology in which Cisco was the emerging leader. As networks were becoming more complex, LAN switches – a simpler, more cost-effective product that was efficient at solving a subset of tasks historically solved by routers – became popular and gained in importance. Nonetheless many believed, not only within Cisco, but also at many customers and throughout the industry, that routers could easily solve all the requirements and there was no need for a switch in a network.
Enter Boeing, a major Cisco customer. Boeing was planning a significant network expansion, that would require both routers and switches and told Cisco that their preference and intention was to buy both technologies from one vendor. If Cisco would offer switches in addition to routers, Cisco would be their choice.
Rather than try to convince the customer that routers can replace switches, Cisco wasted no time in approaching Crescendo, a leading vendor of switching technology, and shortly thereafter completed the acquisition of the company. Now Cisco had routers and switches. The acquisition was executed despite some’s belief that routers were superior to switches and networks could be designed with routers only or that Cisco would have enough time to develop its own switches internally (also known as the “not invented here” syndrome). As John Chambers, Cisco’s long time CEO, liked to emphasize, “at Cisco, when it comes to technology, we have no religion”.
The acquisition was a major success partly because of the highly complementary technologies and products, but also because of the cultural fit between two innovative and customer focused Silicon Valley companies. According to Chambers, Cisco was able to rapidly scale Crescendo’s run rate from $10 million to $500 million in 18 months! In addition, Cisco and Crescendo planned and executed the integration flawlessly with Crescendo becoming a separate business unit within Cisco. Several of Crescendo’s senior managers took on key leadership positions and played a critical role in Cisco’s success in the next two decades. The acquisition solidified Cisco’s dominance in the enterprise networking market in the mid 90’s and is the first chapter in Cisco’s highly acclaimed M&A textbook.
… and worth mentioning, more than 25 years later, after leaving Cisco, John Chambers and some of Crescendo’s leaders started a new venture, Pensando Systems, that was recently successfully sold to AMD.
A simple but important lesson for those planning M&A transactions, be it on the buy side or the sell side, is to consider the impact a given transaction has on customers and pay close attention to their input… it could be invaluable!