Scientific-Atlanta purchase changes Cisco's acquisitions rules

With its US$6.9 billion purchase of cable set-top box maker Scientific-Atlanta, Cisco is straying from CEO John Chambers' oft-stated strategy to acquisition success: buy small and buy local.

"Our overall acquisition strategy has not changed," Chambers told investors during a conference in July. "We still prefer small acquisitions with geographic proximity, usually a private company with about 100 employees."

The Scientific-Atlanta acquisition is by no means small - tied for Cisco's largest-ever with its US$6.9 billion purchase of optical gear maker Cerent in 1999. And as the company's name states, it's on the other side of the country from San Jose.

Analysts say the move is strategic for Cisco, as cable operators and RBOCs are scrambling to be the first to dominate the emerging IPTV and IP video-on-demand markets for consumers. With many of these service providers already using Cisco in cable head-ends and central offices, putting a Cisco device in the home makes sense.

But before the Scientific-Atlanta buy, Cisco's 10 acquisitions this year totaled just over US$1 billion; seven out of the 10 buyouts were less then US$100 million.

Some of Cisco's biggest hits have been not with blockbuster acquisitions, but with prominent deals hovering just under the US$1 billion mark. Its buyouts of IP PBX maker Selsius in 1998, wireless gear maker Aironet in 1999, and VPN vendor Altiga in 2000, all led to market-leading product lines for Cisco with more than US$1 billion in sales in each category.

It's the really big deals where Cisco seems to stumble.

When it bought ArrowPoint Communications in 2000, the dot-com bubble was at its peak, and the advanced Layer 4-7 switching technology ArrowPoint had was a hot commodity. (Nortel bought its top rival Alteon for US$7.3 billion.) Since 2000, analysts estimate that Cisco has sold around US$1.3 billion in content switching gear - about a 22% return on the investment.

In optical, Cisco spent US$2.15 billion on optical gear maker Pirelli and a combined US$7.4 billion on optical router start-ups Cerent and Monterey. According to the Dell'Oro Group, Cisco's total revenue in optical networking since it entered the market is around US$3.25 billion.

"It's not quite the return Cisco probably expected," when it invested almost US$10 billion in optical, says Dell'Oro senior analyst Jimmy Yu, who tracks the optical market.

But if any vendor knows how to do buyouts overall, it's Cisco.

"When [Cisco] acquires a company," Chambers said previously, "we are acquiring a next-generation product or technology, but we're also acquiring people," usually at a cost of around US$1 million per person. He said that most acquisitions in the industry see 40% of employees of the acquired company leave after two years, while Cisco has kept its attrition rate of acquired employees at around 2%.

"It is hard doing acquisitions," Chambers said. "You have to have the right culture and you have to have a process."

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