Cisco Acquisitions: How Cisco Keeps Its Startup Engine Humming

Exit Strategies for Enterprise Startups

Enterprise startups generally pursue a limited number of exit strategies. While an Initial Public Offering (IPO) is a possibility, the majority of successful ventures ultimately achieve an exit through acquisition.

Frequently, these acquisitions are completed with large, actively acquiring companies such as Salesforce, Microsoft, Amazon, Oracle, SAP, Adobe, and Cisco.

Cisco’s Acquisition History

Cisco stands out with a particularly extensive record of growth through strategic purchases, often referred to as “spin-ins.”

Over its entire history, Cisco has acquired over 229 startups, with more than 30 acquisitions occurring in the past four years alone.

Recent additions include Epsagon, acquired earlier this month, alongside Slido, Sedona Systems, Kenna Security, Involvio, and Socio in Q4 FY2021. Notably, three of these were announced within the same week.

Understanding Cisco’s Approach

What drives Cisco’s consistent acquisition activity? What factors enable them to move so efficiently?

For startups engaging in discussions with Cisco, what key considerations should be kept in mind to facilitate a positive outcome?

Insights were gathered from Cisco’s CFO, Senior Vice President of Corporate Development, and the General Manager and Executive Vice President of Security and Collaboration to illuminate their acquisition strategy.

The Acquisition Methodology

Cisco has refined a comprehensive methodology for identifying potential startup acquisitions that align with its strategic objectives.

This evaluation encompasses not only the product itself, but also the quality of the team and the proposed price, all of which contribute to a successful transaction.

Startups can anticipate a thoroughly established process, covering all stages from initial targeting and negotiation through to the final integration into Cisco’s organizational structure.

A Proven Strategy

Despite extensive experience, not every acquisition will proceed flawlessly.

However, since its first acquisition of Crescendo Communications in 1993 – a purchase that ultimately fueled its dominant switching business – Cisco’s approach has demonstrably proven effective, leading to its continued reliance on this growth strategy.

The Foundation of Acquisitions: Capital Reserves

Companies aiming for growth through acquisition typically possess substantial cash reserves. Cisco Systems exemplifies this, currently holding over $24.5 billion in cash and equivalents, a decrease from the $46 billion reported in 2017.

According to CFO Scott Herren, this robust cash position provides the company with the agility to pursue strategic acquisitions as opportunities arise.

“The company consistently produces approximately $14 billion in free cash flow annually, after accounting for capital expenditures. Approximately $6 billion of this is allocated to dividend payments,” Herren explained. “Share repurchases are also utilized to counterbalance equity grant programs, yet a significant amount of cash remains available year after year.”

Herren views acquisitions as a key mechanism for bolstering revenue growth and advancing the company’s broader strategic objectives. “Our acquisition strategy is centered on identifying crucial innovations and companies that seamlessly integrate with and support our existing strategy,” he stated.

“Evaluating potential deals involves assessing financial viability and ensuring the seller’s price expectations align with our valuation. Acquisitions remain a vital component of our strategy for sourcing innovation and stimulating top-line growth,” he added.

Duo Security (2018), ThousandEyes (2020), and Acacia Communications (2023) are cited as successful examples of acquisitions that have both fostered innovation and contributed to revenue expansion. Each acquisition supports a core element of Cisco’s strategy – security, network observability, and advanced internet infrastructure – while simultaneously driving growth. A primary motivation behind these acquisitions is arguably the preservation of growth momentum.

Strategic Acquisition Criteria

• Innovation sourcing
• Strategic alignment
• Financial feasibility
• Contribution to top-line growth

These factors are considered paramount when evaluating potential acquisition targets.

Maintaining a strong growth trajectory is a central theme driving Cisco’s acquisition strategy.

Cisco's Strategic Acquisition Approach

While fundamentally a networking equipment provider, Cisco has actively pursued market expansion and diversification beyond its traditional networking base. This has involved significant investment in sectors like communications and security over several years.

Notable acquisitions include WebEx, purchased in 2007 for $3.2 billion, and AppDynamics, acquired in 2017 for $3.7 billion shortly before its planned IPO. Alongside these larger deals, Cisco has also completed numerous smaller acquisitions, such as the $125 million purchase of MindMeld.

Identifying Potential Acquisitions

Derek Idemoto, Senior Vice President of Corporate Development and Cisco Investments, has participated in over 100 of these acquisitions, playing a key role in identifying companies of interest.

His team categorizes potential targets based on their strategic value, determining if they enable Cisco to enter new markets – exemplified by the WebEx acquisition – expand existing markets – as seen with Duo Security – or acquire valuable technical expertise and innovative technology, like the purchase of BabbleLabs.

A Proactive Scouting Process

Cisco maintains a close watch on a pool of up to 1,000 startups that could be potential acquisition candidates.

“Derek’s team consistently engages with startups, attending industry events to discover early-stage companies developing groundbreaking solutions,” explained Herren.

The focus is on identifying companies with exceptional founders or technologies that align with Cisco’s strategic objectives. Building relationships with these companies is a priority.

Cultivating Innovation Through Investment

“Derek actively fosters these connections, tasking his team with identifying the next generation of companies, even if an immediate strategic fit isn’t apparent,” Herren continued. “This proactive approach has been instrumental in our success in identifying suitable targets and fostering innovation.”

Cisco frequently makes strategic investments in companies of interest, providing direct insight into their operations and assessing their potential as acquisition targets.

“Our investment strategy is comprehensive,” Idemoto stated. “While financial returns are important, we prioritize strategic alignment and partner with reputable investors. We allocate approximately $200 million annually to startups and funds.”

Exploring Partnerships Before Acquisition

Cisco also explores commercial partnerships as a means of evaluating a company’s operational dynamics and cultural compatibility.

These partnerships can potentially pave the way for a full acquisition if a strong strategic alignment is confirmed.

The acquisition of Duo Security serves as a prime example. “We invested in Duo a year prior to the acquisition and considered a purchase, but timing is crucial. We opted for an investment and strategic commercial partnership, ultimately leading to a successful acquisition for both parties,” Idemoto noted.

Integrating Acquired Companies

Following the completion of a deal, the process naturally progresses through internal discussions, negotiations, and legal procedures to finalize the acquisition. However, the subsequent integration of the newly acquired company into Cisco is a critical phase.

According to Idemoto, successful integration is integral to the acquisition strategy, with the approach varying significantly based on the acquired company’s specific characteristics and the complexity of their offerings.

“A standardized approach isn’t effective; instead, a tailored strategy is required to identify and maximize the synergistic value between the two organizations,” he explained. This necessitates a case-by-case evaluation of integration needs.

The responsibility for integration often falls to the respective product teams. Jeetu Patel, EVP and GM of Cisco’s security and collaboration business units, emphasizes the importance of fostering a welcoming environment for new team members, believing that employee comfort is fundamental to a successful acquisition.

Beyond the human element, the fate of the acquired product is also considered. Sometimes, the product is integrated into an existing Cisco product line, while in other instances, it retains its branding and continues as a standalone offering. The decision is contingent upon the company and the predetermined plan for the acquired entity.

Patel stated that rapid product integration is a key priority. As an illustration, the acquisition of BabbleLabs, which coincided with Patel’s arrival at Cisco, saw its noise-filtering technology incorporated into the Cisco platform within approximately 30 days. While this pace isn't always achievable, swift integration remains a central objective.

Although acquisitions can accelerate product development, Patel underscored that the primary focus remains on internal innovation. He aims for the majority of advancements to originate from Cisco’s internal teams, rather than through acquisitions.

“Our strategic emphasis is on ensuring the company remains dedicated to product development and continuous organic innovation. This is paramount. We strive for the bulk of our innovation to stem from within, not from acquisitions, which is crucial for maintaining our cultural values,” he noted.

Despite the significant investment in acquisitions, Cisco acknowledges that not every venture will be a success. However, by aligning its acquisition strategy with its overall business objectives, the company aims for a high success rate, while simultaneously providing startups with potential partnership, investment, and exit opportunities.