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CISCO ACQUISITION STRATEGY

Questions for discussion


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Value created through structured acquisition process.


Could Cisco have achieved the same results without the values .
Type of challenges that business units face with the M & A process.
Why was it important to involve human resources in the acquisition process?
Metrics to be used to determine the success of an acquisition? Retention or Market Share
Ciscos Acquition strategy? Does it work for others also.
Was it possible for Cisco to pursue the acquition strategy and simultaneously devote resources to internal R & D?
Does Cisco have an appropriate goal for balancing internal and external innovation?
Can Cisco keep this approach in to 21st century?

Introduction
The key principle behind buying a company is to create shareholder value over and above that of the sum of the
two companies. Two companies together are more valuable than two separate companies - at least, that's the
reasoning behind M&A. This rationale is particularly alluring to companies when times are tough. Strong
companies will act to buy other companies to create a more competitive, cost-efficient company. The companies
will come together hoping to gain a greater market share or to achieve greater efficiency. Because of these
potential benefits, target companies will often agree to be purchased when they know they cannot survive alone.
Synergy is the magic force that allows for enhanced cost efficiencies of the new business. Synergy takes the form
of revenue enhancement and cost savings. By merging, the companies hope to benefit from the following:
Staff reductions

Economies of scale

Acquiring new technology - To stay competitive, companies need to stay on top of technological
developments and their business applications. By buying a smaller company with unique technologies, a
large company can maintain or develop a competitive edge.

Improved market reach and industry visibility

1. Value created through structured acquisition process.


Value: which means be worth. Value creation means performing activities that Increases the value to customers
and also to the Shareholders.
Value Creation through M&A Synergies & Economies of Scale Gain access to new markets, customers,
products Diversification of Risks Access to New Technology and Knowledge Ability to limit competition /
gain market share
2. Examine Ciscos growth through acquition strategy
Ciscos growth strategy has been linked with the acquition of business units that are in line with ciscos future
vision or atleast capable to remain at par with its future prospects. Ciscos growth strategy has eventually
evolveded with the passge of time and with each acquitions it made over the past decades.
The Industry has been named ciscos growth strategy through acquition as Acquition and development which
denotes that cisco mainly focused on to buy technology rather then spent time and efforts to build it internally, as
it has let the silicon vally companies to do all the R&D on emergin technologies.
Its acquition strategy was alwys achived in a friendly manner as hostile takeovers always create problem in the
longrun. Its goal was to own atleast 50% market share through acquisitions or atleast 20 % market share post
acquisition thus cisco always drive to create immediate value for shareholdrs rather then wait for a substantial
period of time to generate the same .
The acquition strategy of cisco was based on 5 criterions to evaluate any potential deal of M&A.

1. The Target company shold share same visions as with cisco or atlest has potential to pursue its visions
and missions in the longri=un.
2. Quick value creation with in a shortest possible time period
3. Thre must be a matching chemistry between the target company and Cisco.
4. There must be future value addition for its shareholders and other stake holders such as employees,
customers, and business partners
5. The target company should be in the proximity to theparent companies location i.e related to same
geographical location.
Potential targets those meet all of the 5 criterias are actively persued and allowed to be integrated with cisco.
Thus through its unique acquisition strategy cisco ensures that its target company should posses minimum
risk on product side as uit has already passed its r&D phrase yet ready to be introduced in to the market by
using ciscos marketing platform.Each acquisition by it has been ensured to payoff at a very early period of
investment so that the parent company can afford to keep thenewly acquired resources and man power with it.
Strict due diligence from different perspectives such as HR, Manufacturing, Marketing and Engineering has
to be done by ciscos cross-functional team to avoid future discrepancies.
Cisco only pursue friendly takeovers ,and avoids hostile takeovers thus ciscos acquition team conduct the
acquition processes by friendly talks , negotiations and not by competitive bids or auction bids.
A two year non compete agreements with the target companies , key executives and technical personeal and a
provision of Ciscos stock option that will be vested over the time priod.
Ciscos acquisition team belives in quick acquitions thus its involvements in the target company begins from
the vary day of announcement of acquisition process mainly by physical presence of its IT personeal , HR or
engineering personeal.
Cisco offers attractive remunation packages to the newly acquired manpower which is often higher then their
existing company could afford to pay them thus was able to put tap on employee turnover.
In a nutshell Cisco has developed a twofold integration approach such a (a) Personel Intgration and (b)
Product integration and ensures that both gets implemented beforehand the completion of the integration
process.

3. Could Cisco have achieved the same results without the values?
No , reason need to be answered?
4. Type of challenges that business units face with the M & A process.
The Global recession led to a significant decrese in M& A activity , other factors such as limited access to
cash and rising uncertainty across markets made it difficult for companies to strike a successful M&A deal
.following are some challenges normally faced by firms involved in the acquisition activity.
1. Companies need to approach M&A more strategically as well as Due- deligence required
inaddition to greater visibility at the executive management level in also needed.
2. Identification of appropriate targets/ Buyers at the pre-phase of the deal . top challenge for buy
side is the identification of appropriate acquisition tagets along wiyth other requirments such as
appropriate financial valuation , setting and executing the m&A strategy etc. on the sale side the
main struggle is identifying appropriate buyers , to differenciate between hostile buyers and
friendly buyers,as well as other matters that are challenging like information gathering and
evaluation of indications and bids , understanding the history of potential buyers and gathering
market information in order to strike a better deal.\
3. Challenges for M&A management is the effective measurement of performance as most of the
companies donot have a systematic approach for cost and synergy management and are not
familier with evaluation of longterm effects of the proposed M&A activity.
4. Difficult to manage an effective and efficeant collaboration and communication between internal
and external stakeholders

5. Why was it important to involve human resources in the acquisition process?

Success of merger and acquisitions depends on the people who drive the business, their ability to drive, lead,
and formulate strategy, execution and implementation. It is very important to involve human resources in
merger & acquisition as it involves people and has an impact on key people issues. Human resources play an
active role in the change process by offering their interventions to help ensure a successful merger and
acquisition.
Roles of Human Resources in M&A process

Maintaining the productivity by placing of right people at right place


Alignment of compensation, benefits and welfare schemes
Job security, Relocation, Compliance of local labor laws Employee communication, Taking care of
personal records
Transition and communication of the same to employees.
Train managers on the nature of change Orientation programs on policies and procedures, on
performance management, compensation, benefits and welfare schemes ,
Identify the skills of people and mapping them appropriately

6. Metrics to be used to determine the success of an acquisition


The key to success is knowing what to buy and for what reason. As a result, defining M&A success revolves
largely around understanding the main strategic rationale for the transaction, Following are some Metrics that
need to be considered for a successful M&A
a. A geographic merger is essentially a land grab, enlarging the purchasing firms customer base with a
new set of customers. As the aim is to increase sales, in these deals one of the main metrics is increased
sales revenue. Depending on the purchasing firms organisational set-up, increased sales can result in
increased profits. In order to set up the right metrics to measure the success of this deal type, a question to
look at is: is the customer-facing organisation run on a revenue or profit basis?
b. In purchasing a new technology or a new product, one aim is to increase sales of the new technology by
ensuring its access to the purchasing firms sales channels. In this deal type, sales may ramp up much
more slowly than in a geographic merger. Still, this is a growth-oriented deal, aimed at rapid revenue
increase. An additional aim in a technology transaction is combining both firms technological know-how,
eg in joint research and development projects. A viable success metric reflects the speed at which jointly
developed products come to market.
c. In purchasing customers, the logic is in many ways similar to the geographic merger with the difference
that, in this case, the firms customer bases reside in the same geographical area. There are two options
for this deal type:
d. The purchasing and target firms customer bases are overlapping. The aim is to increase sales. The
challenge is to avoid losing customers that are sourcing from both firms, and to ensure that the overall
customer base is properly served. What service levels and product quality will be sought? The success
metric fitting this deal type is monitoring revenue and profit as well as product quality, service levels,
product returns, and customer complaints. The latter metrics provide early warning signs as regards
meeting sales targets.
e. The merger enables the purchasing firm to enter a new sector. Success metrics to use are sales, revenue,
and/or profit. Numbers of customer contacts can be used to predict future sales levels. As the aim in the
deal is not only to learn about the new markets, but also to start cross-selling products between the firms
current and new markets, also new product development (NPD), or ideas for NPD can be tracked.
f. To deliver on cost cutting, both firms need to be analysed from an efficiency perspective. The aim is
thereafter to monitor the cost cutting exercise as minutely as possible. Also, the amount of money
invested in the change or efficiency projects themselves is tracked. Third, the increase in profit and
progress on hitting set P&L targets need to be monitored. Possible double counting of synergy savings
should be avoided.
g. To deliver on the growth side of this merger, as in the above deal types, sales, revenue, profit, and
increases in margin will be monitored. Also innovation levels, ie NPD, potentially leading to a larger
product range and thus increased sales, need to be tracked.

Cisco method of integration

Cisco used a variety of metrics to measure the success of each acquisition effort. Typical metrics include the
following:
Retain 100 percent of the employees who transition from the acquired company.
Sustain the acquired company's current product and service revenues (as well as current levels of service
and support) during and after the transition to Cisco.
Launch new Cisco products based on the acquired products and technologies.
As part of the integration approach and plan, Cisco applies the following tactics to enhance the customer
experience:
Repackage and rebrand an acquired product or technology as a Cisco product when appropriate.
Identify potential new product and service revenue opportunities within the acquired company's existing
customer base and sales prospects.
Provide the new customers with a single interface for product support and service and maintain customer
satisfaction.
Integrate the sales channels and services functions of Cisco and the acquired company as appropriate.

Cisco has evolved a unique approach to integrating acquired companies. This approach encompasses the following elements:

Formalized and centralized integration management through a designated team in the Cisco Business Development
group.

Cross-functional teams for each acquisition that plan, manage, and monitor integration activities across Cisco.

Standard principles, metrics, tools, methods, and processes that can be repeatedly applied to new integration efforts,
yet are adaptable to the unique issues and parameters of each deal. These standards are defined both at the
corporate level and within the many Cisco departments involved in acquisition integration.

Extensibility of the acquisition integration model to other major change events, such as divisional consolidations, divestitures,
or acquisitions by Cisco divisions
Integration Principles
The following principles guide Cisco acquisition integration activities:

Orientation. Set common standards so that all internal organizations and integration activities are bring into line to
achieve the business goals of the acquisition.

Communication. Enhance cross-functional communication to highlight interdependencies, overlaps, and gaps in


activities and schedules, and to encourage cooperation on integration tasks.

Operational effectiveness. Continually improve integration capabilities across Cisco by:


o Promoting consistent, repeatable processes that can reduce integration project setup time and assist with
resource and capacity planning
o Adapting integration standards to accommodate different business models as Cisco acquires large
companies and those offering different types of products and services

Incorporating the lessons learned from each acquisitionCisco uses a variety of qualitative and quantitative metrics to measure
the success of each acquisition integration effort. Typical metrics include the following:

Retain 100 percent of the employees who transition from the acquired company.

Sustain the acquired company's current product and service revenues (as well as current levels of service and
support) during and after the transition to Cisco.

Launch new Cisco products based on the acquired products and technologies.

As part of the integration approach and plan, Cisco applies the following tactics to enhance the customer experience:

Repackage and rebrand an acquired product or technology as a Cisco product when appropriate.

Identify potential new product and service revenue opportunities within the acquired company's existing customer
base and sales prospects.

Provide the new customers with a single interface for product support and service and maintain customer
satisfaction.

Integrate the sales channels and services functions of Cisco and the acquired company as appropriate.

and support, and finance. For information on Cisco IT integration practices, refer to the case study "IT Acquisition Integration"