Note: We published this article first on TechCrunch under the title ‘10 key lessons about tech M&As from Cisco’s John Chambers’
John Chambers, chairman emeritus of Cisco (now founder of JC2 Ventures), knows a thing or two about tech acquisitions. He bet his career on his first M&A in ’93, and went on to complete 180 M&As during his 20 year tenure.
His latest message for large corporations is an alarm bell.
At a fireside chat at the M&A Masterclass that HAX organized following the publication of his book: Connecting the Dots: Lessons for Leadership in a Startup World, Chambers issued a clear warning: learn about tech M&A or the future will happen without you.
Learn about tech M&A or the future will happen without you
Who Should Read This?
- Executives in charge of M&As (as a CEO, CFO, corp dev, lawyer, banker or else). The chances of success of acquisitions will go up, which is literally at least a million dollar question.
- Startup founders, to understand the mindset of buyers. This will help you increase opportunities and not leave money on the table. Read also What Every Startup Founder Should Know About Exits.
Note: This is a slightly augmented version of an article we published on TechCrunch. It follows What Every Startup Founder Should Know About Exits.
Here are the key lessons to take away (video and the full illustrated transcript are here):
1. M&A Is A Vaccine Against Irrelevance
When stepping down from Cisco in 2015, John Chambers said that 40% of companies will be dead in 10 years.
‘40% of companies will be dead in 10 years’
And now, that prediction of 10 years might even seem conservative:
- It took about 20 years for Amazon to challenge WalMart,
- It took barely 10 for Airbnb with hotels, and for Uber with taxis and car ownership.
The next wave might only take 4–5 years.
2. Tech Is Entering Every Sector
‘Every company you’ll acquire over this next decade will probably be indirectly or directly a tech company’, said Chambers.
Non-tech companies need to get up to speed on how to work with tech, and startups. Many of the corporate development executives who attended our last event were not from tech.
I recently met with some power tool companies from the US and Europe that had just set up CVC arms. They were looking into acquisitions, saying “we don’t know software”. They’d better tackle that M&A learning curve quickly!
3. Your Customers Can Tell You What To Buy
There was only one Steve Jobs, who just knew what to build. For others, your customers will tell you what to buy. Listen to them and pay special attention to market transitions to buy next generation products.
Like Chambers experienced early in his career at IBM with mainframes, and at Wang Laboratories with mini-computers, missing a critical shift might be the end of your company! The corollary for startups is: do something cool for key customers of a corporate, and you’ll get on their radar in no time!
Do something cool for key customers of a corporate, and you’ll get on their radar in no time.
4. Pick The Right Match
‘When you buy a company, everything is negotiable except strategy and culture’, said Chambers.
Oracle has mastered takeovers but, for most others, acquisitions can fail due to a number of reasons. They could be:
- Poor alignment of vision for the industry, and each company’s role after the transaction,
- Cultural mismatch. Chambers avoided any company whose culture was too different from Cisco’s. It included whether the target was customer-focused, and shared their success with their employees.
- Geographic distance
- Lack of integration of systems. Once you begin to scale the number of acquisitions, the different software used among divisions or subsidiaries might drive your CFO insane.
Usually, there is more than one possible M&A target, and Cisco often walked away from potential acquisitions for the aforementioned reasons. It also developed efficient processes.
‘I used to view process as bureaucracy, but process done right can give you speed that others cannot match’, Chambers added.
‘Process done right can give you speed that others cannot match’
5. Build Your Playbook(s)
Back in the 90’s tech M&As were often failures. Chambers and his team researched why and wrote Cisco’s playbook, then continued to tweak it for 2 decades. According to Chambers, most of the playbook is broadly applicable; therefore, save yourself some time and costly mistakes by buying his book. ;)
Interestingly, they approached a leadership succession strategy in the same way. They analyzed why successions succeeded or failed, and made it as smooth as could be when John stepped down in 2015. It became a case study by Harvard Business School.
6. Do Your Homework
One common trait of experienced corporate development teams is the amount of work they put in before they approach a startup.
In addition, acquisitions are like investing in that you are only as good as your deal flow.
A comprehensive approach incorporates information and leads from your customers, your business units, your CVC arms, but also contacts with bankers, lawyers, VCs, the media, and other networks.
A top notch corp dev team then models the value a startup should bring, and pays the right price for it (more on this below).
7. Pay For What The Value Is To You
A hot startup can command a high price, but is it worth it for you?
- An acquisition’s value might be negative if it does not offer any compelling synergies.
- The current revenue of a startup might understate its value if you can blow their product through your channels and make it 10x or 100x.
An example of the latter is Crescendo Communications, a company that Chambers acquired in ’93 for nearly $100 million, although it only had $10 million in revenue at the time. It paid off in droves as it grew to over a billion in annual revenue. Some of its executives also created several other billion-dollar products for Cisco.
8. Keep The Talent
When you acquire a tech company, you must try and retain the talent — especially the founders, emotional leaders and engineers.
Understand ‘Leaders Currency’: Track record, Trust and Relationships. You should involve your HR team to answer key questions and help define attractive career paths within your organization for the acquired teams. If you fail to do so, people might leave or underperform, and you risk not getting the new products you hoped for.
At Cisco, about 1/3rd of the top leadership came from internal promotions, 1/3rd from recruiting and 1/3rd from acquisitions. At the peak, it likely had about 100 former CEOs on its payroll!
9. Expect Some Failures
Despite its stellar track record, about a third of Cisco’s acquisitions were failures. Reasons vary, and some might be caused by market changes. For example, it decided to shut down Flip Video within 2 years after its $590 million acquisition. Apple had just added cloud video capabilities to its phones; it was game over.
Expect them, learn from them, and be ready to cut losses and, ideally, redeploy people to retain their value and protect your reputation as an acquirer.
10. In The Future, Acquisitions Might Not Be Enough
As the pace of innovation accelerates, and top talent joins startups rather than large companies, startups might become threats faster than you can acquire them. Yet, acquiring them too early would equally result in failure.
The next-level skill to develop might thus be the ability to form strategic partnerships very early on with startups.
As an example, Boeing recently formed a joint venture for urban aerial mobility with SparkCognition, a much smaller, 5-year-old A.I. startup (disclosure: Chambers is an investor in SparkCognition).
Conclusion: The Future With Tech Acquisitions
After electricity and internet, the world is moving to software, A.I. and automation in all things. It is likely that future relevance will be determined by the ability to work with or acquire startups.
Note: Visit here for the video and illustrated transcript.
Thanks to speakers, participants and supporters of this Masterclass series, in particular: Natasha Ligai (Logitech), Todd Neville (IBM), Christina LaMontagne(Johnson & Johnson), Anne Samak de la Cerda (former CFO, Withings), Dan Fairfax, (former CFO, Brocade), Amanda Zamurs and Larry Chu (Goodwin), Kate Whitcomb and Ethan Haigh (HAX).