Cisco offers a glimpse at the risky business of acquisitions

Cisco has made 16 acquisitions in the past two years (that makes 122 tech buys since 1993) and statistically speaking it's likely anywhere from one to four of them will fail. "Approximately a quarter of our acquisitions don't work," Cisco's senior vice president Howard Charney, told attendees of the company's Networkers show in Australia this week.

According to Australian IT News Charney wouldn't name specific companies, but added that these acquisitions were still beneficial as they delivered new intellectual property, staff, and users to Cisco.

In Cisco's 10-K filing yesterday it said: "We have acquired many companies, and we expect to make future acquisitions. Mergers and acquisitions of high-technology companies are inherently risky, especially if the acquired company has yet to ship a product. No assurance can be given that our previous or future acquisitions will be successful or will not materially adversely affect our financial condition or operating results. Prior acquisitions have resulted in a wide range of outcomes, from successful introduction of new products and technologies to an inability to do so."

Cisco lists a number of somewhat obvious risk factors that could impact its results as well as its acquisition strategies. Included among them are: Fluctuations in demand for its products and services. Changes in sales and implementation cycles for its products and reduced visibility into its customers' spending plans and associated revenue. The introduction and market acceptance of new technologies and products and Cisco's success in new markets, including emerging and advanced technologies, as well as the adoption of new networking standards.

The company's most notable acquisition strategy failure involved optical networking. In fact in its 10-K filing Cisco said that beginning in fiscal 2007, sales of optical networking products will no longer included in its advanced technologies product category and instead will be included in the "other" product category. Problems in that technology area surfaced soon after Cisco's purchase of Monterey Networks, in 1999.

Cisco currently lists the following as its advanced technologies: application networking services, home networking, hosted small-business systems, security, storage area networking, unified communications, video systems and wireless technology.

In it's 10-K filing Cisco says it is in the process of identifying additional advanced technologies for focus and investment in the future, and our investments in some presently identified advanced technologies may be curtailed or eliminated depending on market developments. "We have also continued to focus on developing a new wave of technologies, which we refer to as emerging technologies, including such products as digital media, TelePresence, and physical security, among others."

Still, problems seem to be few and far between for Cisco's acquisitions. A story from US News & World Report last year said that in addition to balance sheets and business models, Cisco scrutinizes would-be acquisitions' cultures and visions. It holds meetings with everyone from junior engineers to top execs, observing who speaks and for how long, gauging how open the company is to debate and discussion, and watching how team members treat one another. Cisco doesn't do hostile takeovers, but it also doesn't want to buy a company whose people will head for the exits.

And indeed they don't. In the 10-K filing, Cisco states hired 11,609 people in fiscal year 2007, which ended in July. The company now has a total headcount of 61,535. Of that total, some 3,300 came from mergers. As of July 28, 2007, we employed 61,535 employees, including 16,227 in manufacturing and service, 18,410 in engineering, 21,465 in sales and marketing, and 5,433 in general and administration. Approximately 26,500 employees are in locations outside the United States, Cisco stated.