2004 was an eventful year for the Israeli branch of Cisco Systems (Nasdaq: CSCO). Cisco is the world leader in connectivity products and end-to-end solutions. Cisco Israel made a series of acquisitions over the past year, fired its entire sales management team at once, and promised to go on signing more fat checks for the further expansion of its development center in Netanya, which already has 400 employees.
Press coverage of Cisco’s unpleasant layoffs and three acquisitions in 2004 was extensive, but few bothered to check what happened to the companies that Cisco acquired in 2000, or which developments were worked on at Israel’s most discussed development center in 2004.
Had Cisco CEO John Chambers been asked in 2000 what his company’s development center in Israel would look like several years later, he would almost certainly have said that it would concentrate on field related to the business of the companies that Cisco had acquired. The logic is simple. When a foreign company buys activity in Israel, its development there follows that of the acquired company, and it tries to expand that development, either through internal development, or through related to the acquired company’s business.
Cisco’s acquisitions in Israel in 2000, however, can be characterized, to put it diplomatically, as unsuccessful. Most of the activity purchased in Israel has sunk without a trace, and the acquired companies’ technology was not used in Cisco’s products. Soon after the acquisitions took place, all that remained of them was the engineers, who in most cases worked on activity unrelated to that of the acquired companies. In some cases, an acquisition had a degree of success, when some of the acquired company’s technology was taken out of Israel, and sent to overseas development sites.
Incidentally, the situation in Cisco Israel does not differ from that of the parent company, which has acquired a total of 26 companies, including the four in Israel. Following the severe crisis in the technology industry, Cisco decided in 2001 to substantially cut back on its activity, and did not absorb companies that it acquired.
Not exactly Chromatis
Cisco’s least successful acquisition was obviously InfoGear, for which Cisco paid $308 million in shares. InfoGear developed end-user Internet access equipment a personal digital assistant (PDA) with an eight-inch screen that hooked up to the Internet through a telephone line, and made it possible to browse special content sites. Cisco acquired the company in order to supply what was then strong demand for high-speed Internet.
The feeling at the time was that if Cisco could promote home use, it could sell more routers and switches. Cisco still has InfoGear’s technology for managing Internet devices, but InfoGear’s terminal was shelved within a short time.
Another acquisition that went wrong was Pentacom, for which Cisco paid $118 million in cash and shares in 2000. Pentacom is very reminiscent of what happened to Chromatis Networks, which operated in the same field. Pentacom developed a fiber-optic data communications system for urban networks. Shortly after the acquisition, Cisco decided against development of follow-on generations of Pentacom’s products. Two years later, Cisco decided to completely discontinue sales of Pentacom’s products.
Cisco’s experience with HyNEX was not much better than with its two predecessors. Cisco acquired HyNEX from Elbit in June 2000 for $127 million in cash and shares. HyNEX’s products were designed for two markets. One was hylink products, which connect wide area networks (WAN) to local area networks (LAN), while supporting the conversion of LAN protocols to a standard asynchronous transfer mode (ATM) protocol. The other was HUNT products area codes and location products for WAN. These products were designed to provide access to public ATM networks, while giving WAN operators better control over service quality in bandwidth, and which data and customers are given priority.
After about a year, Cisco decided that HyNEX’s product families were unsuitable, and sold HyNEX’s intellectual property to another of its portfolio companies, Israeli company Tdsoft, for a mere $1 million. The sale also involved laying off half of HyNEX’s employees, who numbered 50 prior to the acquisition.
Two acquisitions from the same period that were successful were Seagull Semiconductor, acquired for $19 million, and Class Data Systems. “The success of a merger is not measured solely by sales of stand alone products, but also by the total value that the acquired company brings to the parent company, and the group of people that join Cisco, who can be channeled into other fields. The acquisition of Seagull was mostly an acquisition of talent, which helped us accelerate our development of super routers,” Cisco’s development personnel explain.
Cisco paid $50 million in cash and shares for Class Data. Development of QPM, Class Data’s quality of service (QoS) product, is no longer conducted at Cisco’s Israeli development center, but the product is still being sold under the Cisco name, and Cisco is continuing its development.
Half of Cisco’s employees from acquisitions
Cisco began operating in Israel in 1996, largely because of Michael Laor, who is now its director of engineering. Before acquiring Class Data, its first acquisition, Cisco had 25 employees developing components for its high-speed packet router. Cisco Israel director of Engineering David Belz, Cisco Israel network management division manager Chaim Bendelac, P-Cube director of development Michael Bin-Nun, Cisco Israel routers division SW development manager Rami Tamir, and Cisco Israel business development manager Yoav Samet all say that while they filled the definition of a start-up, it wasn’t clear at the time where they would go.
The Israeli branch became a development center only two years ago, when Cisco acquired InfoGear, which was after the acquisition of Class Data. “It still wasn’t clear after the acquisition of Class Data whether or not development in Israel would become significant. The acquisition of InfoGear and those that followed it changed the picture,” the development center managers said.
Over the years, merger has become virtually a synonym for Cisco. It is difficult to think of another company that has grown to such huge proportions through mergers and acquisitions as Cisco. Founded in 1984 by a small group of Stanford University computer scientists, Cisco has grown into a communications giant with 34,000 employees, half of whom entered the company through one of its many acquisitions.
All those mergers and acquisitions, together with its super aggressive sales policy, brought Cisco during the boom to an astonishing market cap of $500 billion, and have made it the world leader in routers and switches. The boom is gone, however, and Cisco’s market cap has shrunk to only $124 billion. That doesn’t, however, keep Cisco from searching for bargains, mostly in fields with fairly good growth, such as security, storage, and wireless and optical communications.
Cisco has made eight acquisitions in Israel to date, at an aggregate cost of about $1 billion, and has invested hundreds of millions of dollars in 20 more companies. The spree began with Class Data in May 1998, followed by InfoGear in 2000, Cisco’s biggest acquisition in Israel to date, and three more acquisitions the same year: Pentacom, Seagull, and HyNEX.
Well-oiled sales machine
The high-tech crisis temporarily slowed Cisco’s Israeli acquisition spree, but the campaign has resumed in 2004 with the acquisition of three companies for an aggregate $239 million. The first was in March, when Cisco bought start-up Riverhead Networks, which developed a system for foiling distributed denial of service (DDOS) attacks on network, for $39 million.
Two months later, Cisco acquired Actona Technologies, which develops information storage and concentration technologies, for $100 million. P-Cube, which develops systems for measuring and analyzing IP communications, was next in August, at a cost of $200 million. The people who sold P-Cube to Cisco were the same ones who sold Pentacom four years ago: inveterate entrepreneurs Dr. Giora Yaron, who managed Indigo Israel and National Semiconductor (NYSE: NSM), and his two friends, Yuval Shahar and Benny Schnaider.
”The development environment at Cisco is very flowing and free,” Cisco’s Israeli development managers explain. “The flow of information is very open in every development department, and each developer can see what every other developer in the world is doing, and use other developments in his or her work. When a company is acquired, managers have to do some globetrotting to explain to sales and development personnel what the acquired company does. P-Cube, for example, is now being swamped with offers for cooperation and exchanges of information within the company.
”What affects the acquired company more than anything else is the exposure to Cisco’s global sales team. Cisco has a well-oiled sales machine, and the company makes an effort to prevent the acquired company’s customers from noticing any difference. A company acquired by Cisco goes from place to place in the world to teach sales staff about the new technology that it is introducing.”
How are acquired companies combined with Mother Cisco? Cisco has an interaction group with about ten full-time employees. This group is responsible for overseeing the various activities necessary to connect the acquired company to the parent company. The relationship between this group and the acquired company begins even before Cisco signs the check, and continues for a few months after the check is deposited in the sellers’ bank accounts.
Published by Globes [online] - www.globes.co.il - on January 12, 2005