In 2000, despite the dot-com bubble bursting, Cisco acquired 23 companies. To date they have acquired 224 organizations, an average of seven per year since their first acquisition in 1993. Cisco’s M&A strategy helped propel their hyper-growth in the 1990’s, when they increased their market capitalization from $224 million to almost $500 billion.
Few companies have the resources to complete acquisitions at this rate, and even fewer attempt to. But smaller firms can still learn from Cisco’s successes, and lessons from Cisco’s high-growth era can inform even the most modest M&A programs.
Cisco’s Six Rules
In his extraordinary book
Inside Cisco: The Real Story of Sustained M&A Growth, Ed Paulson lays out Cisco’s six rules for successful acquisitions. These rules were the basic guidelines that Cisco applied to its acquisitions during its high-growth period in the 1990’s. Let’s see how each rule may apply to any size company today.
Rule #1: Vision Compatibility
The target company and acquiring company must have a similar view of the market and a similar philosophy on how to succeed in the market.
Applying This Today: As was the case in the 90’s, there is no substitute for long-form conversations with the founders and executives at the target company. But in the age of social media, content creation and personal brands, be sure to find the places where these leaders post their opinions about the market and their reflections on their own company.
Rule #2: Short-Term Wins
Acquisitions must have a short-term (within 12 months), tangible win. Otherwise “support for the purchase, and the management who performed the acquisition, will erode” (Paulson, 73).
Applying This Today: Cisco went public four years before their first acquisition and faced pressure from shareholders to generate quick wins from their M&A activities. As a result, they tended to target companies that had a product that was nearly market-ready. For private companies, especially those that are well-capitalized, a “win” can be defined more abstractly. It is still important to set an achievable goal and celebrate success so that employees of both companies, your board, and your executives can see forward progress from your M&A activities.
Rule #3: Cultural Compatibility
The target company and the acquiring company must have highly compatible cultures and shared cultural values.
Applying This Today: Culture is key when it comes to acquisition success. If the acquired employees feel like they’ve had the rug pulled out from under them or don’t respect your culture, the integration is at risk and attrition can snowball. The smaller the gap between the two companies’ cultures, the easier the integration will be. Start by looking at the target company’s mission and culture statements, then find what customers and former employees say about how well they live up to them.
Rule #4: Long-Term Wins
The acquisition must provide a meaningful impact for the company’s long-term goals.
Applying This Today: Acquisitions are large endeavors that require real investments of time and money. In times of rapid change and technological evolution, anchor your investment thesis in a strategic plan for long-term success and think broadly about your definition of a “long-term win.”
Rule #5: Proximity
Given that most of their early acquisitions were hardware manufacturers, Cisco had a strong preference for acquisition targets that were based in cities that had a major Cisco facility.
Applying This Today: Physical proximity is less of an issue for a software or services company today than for Cisco’s hardware-based business in the 90’s. But in 2023, “ways of working” are just as important for an acquisition. If your acquisition target is fully remote while your company is in-office, you will have difficulty integrating the two cultures. The same goes for companies that have well-defined workflows and internal tools trying to integrate companies that manage all of their operations in Slack.
Rule #6: No Merger of Equals
Cisco believed that “no merger between companies of equal stature within the same industry is viable” (Paulson 135).
Applying This Today: Target companies that you can fully integrate, from technology to processes to culture, in a short time (less than one year and preferably less than six months). Acquiring or merging with a company of a similar size means that both companies have to agree on a middle ground on every decision, from culture to compensation to email systems, and some key issues may never be fully resolved. When acquiring smaller companies than yours, your way of doing things becomes the default and you limit the number of decisions to navigate.
Other Lessons for Your M&A Program
Emphasize Integration Planning
A common mistake for new M&A programs is to separate the due diligence process from integration planning. One team assesses the technology and other aspects of the company; post-acquisition, it is up to other teams to figure out the messy process of integration.
Cisco emphasized integration planning as a key part of due diligence, and they’re not alone. Global consulting firm McKinsey agrees:
“The programmatic acquirers we interviewed said they often tackle due diligence and integration planning simultaneously—holding discussions far ahead of closing about how to redefine roles, combine processes, or adopt new technologies.” (
Source)
This up-front planning takes dedicated resources; be prepared to commit some of your people, and consider hiring an
experienced consultant to facilitate and map out the integration.
Plan for Full Integration
Fully integrating an acquired company takes dedicated resources from every part of your organization, from HR to sales to engineering. Plan to fully staff the integration until it is 100% complete, but make sure there is a clear and time-limited path to get there.
Don’t Over-Do It
Cisco most takes on smaller acquisitions; at the height of their M&A cadence, they targeted companies that had fewer than 100 employees (or were less than 20% the size of Cisco). They also targeted companies that could be fully integrated into Cisco within 6 months. If you are building a new M&A program, start small. If your goal is programmatic M&A, stay there.
For companies that are larger or more complex, consider a strategic partnership or joint venture instead of an acquisition. This could result in an “integration at the seams” without the difficulty of a full technical, cultural and operational integration.
Gather Culture Signals Throughout
Up-front planning is an invaluable time for gathering cultural signals about the target company. Staff an integration team with members of both companies and task them with integration planning. This opportunity to work together on culture, operational and technical issues can act as a dry run for the working relationship between executives and key team members post-acquisition.
Shrink the ambiguity window
Acquisitions are ultimately about people. Even if your intention is to acquire a product or technology, bringing along the subject matter experts who produced it is key to successfully operating it.
Being acquired is an exciting and nerve-wracking experience for employees. They will be most anxious, and most likely to form opinions about the company that’s acquiring them, immediately after the acquisition announcement. Don’t leave room for speculation; be prepared with as much information as you can, and have a team on-site if possible. Includes information about salary, benefits and title. But also be sure to clear goals for each new team member and make sure they know what success looks like, how to succeed, and where to go for help.
Clear Ownership
Each of Cisco’s acquisitions was sponsored by a specific business unit, so that there was dedicated ownership of the outcome. They also created dedicated “integrations teams” with personnel from Cisco and from the target company. No matter how you do it, make sure there is dedicated ownership of the acquisition’s outcomes at every level, from pre-acquisition until successful integration.
Build a Reputation
Building a good pipeline of acquisition candidates is a long-term proposition. In addition to active scouting, you should create funnels that drive acquisition candidates to you. This can take many forms, but effective strategies include:
• Mentoring, or even funding, startups.
• Sponsoring conferences, hackathons, and other events.
• Creating or participating in incubators.
Establish No-Go Criteria Early
The closer you get to closing a deal, the harder it is to walk away (especially when your focus is on up-front planning). Make sure you have clear no-go criteria that you’re accountable for. If one of them is violated, even if it’s the day you’re supposed to sign, have the discipline to walk away. Cisco passed on 90% of the companies it considered for acquisition.
Focus on Retention
Cisco had a number of very strong advantages in the 1990’s. With their extraordinary sustained growth leading up to the bursting of the dot-com bubble, being acquired by Cisco with an equity package was a dream scenario for most engineers. This undoubtedly helped with employee retention, which in turned made acquisitions more successful.
As much as you can, make sure that employees have a financial package that they’re happy with and that rewards long-term employment to keep employee retention high post-acquisition.
Conclusion
Running a successful M&A program takes long-term investment, but you don’t have to be Cisco to build a successful program. Working to shape your company’s culture today will make your next acquisition more likely to succeed.
“In this business, if you are acquiring technology, you are acquiring people. That is the reason large companies that have acquired technology companies have failed. [...] If you don't have a culture that quickly embraces the new acquisition, if you are not careful in the selection process, then the odds are high that your acquisition will fail.” - John Chambers, former CEO, Cisco Systems
With intentionality and patience, you can build a culture that supports your M&A program to great effect. Just be sure you move as much planning up-front as possible, dedicate the right resources for as long as the integration takes, and be prepared to walk away from a deal if needed.