Cisco's mushy 'spin-in' deals undermine acquisition heroics
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All is fair, right?
Given Cisco's tremendous success and huge cash hoard, you might question whether these spin-ins really hurt the company. (And there have been other spin-ins, although none as lucrative as Andiamo.)
According to our sources, the spin-ins are proving painful to Cisco's morale. We've been told that Cisco's board has reprimanded Chambers for the Andiamo deal and his apparent favoritism for Mazzola and his cronies. The wealth accumulated by the spin-in veterans has made other Cisco employees jealous beyond belief.
For example, one poster on a storage message board writes, "Of the two spin-ins I am familiar with, the guys in charge were very well connected internally within Cisco and had strong coattails to drag along the best talent. Being well connected is a must in order to get the right funding and most importantly to get yourself and your team a sweetheart deal that will pretty much guarantee riches."
Another person writes, "Most of the $20m kind of acquisitions will fall under the 'spin-in' category where Cisco was already invested in a start-up. In fact, a lot of the people in these companies are ex-Cisco. Given that Cisco's options aren't worth much, I believe this is the way Cisco rewards its key talent.
"In some cases at least, some of the companies do stuff that is no big deal technically, and clearly the work could have been done far cheaper inside than the acquisition price paid. That again fits with the 'need' to reward talent."
Such accusations seem to undermine the myriad stories glorifying Cisco's A&D strategy.
"How has Cisco succeeded where so many others have failed,?" asked US News in June's story titled "Cisco's Connections: The tech giant has mastered the art of acquisitions."
"Simply put, experts say, it has professionalized a process that other companies turn to only on occasion - usually out of greed or necessity."
The story goes on to cheer Cisco's ability to perform acquisitions quickly and to maintain talent after purchasing a firm. It quotes an "expert" saying, "They do very few wild and wooly acquisitions. Everything they do is strategic."
And, of course, spinning out and then spinning back in top talent could be considered strategic. Cisco's share price has languished over the past four years, making it tough to tempt workers with lucrative options packages. Under such conditions - hell, under any conditions - the offer of a spin-in must look attractive.
Cisco may pay a premium for the start-ups but it gets their gear and keeps the talent happy. Beyond that, Cisco allows the start-ups to work in an unfettered environment where they can possibly bring product to market faster than a team could do inside of Cisco.
Investors, however, may not see things the same way. After all, the Andiamo group started inside of Cisco, then "left" in January of 2001, received $84m four months later and then received $750m in 2004 while wearing Cisco security badges no less.
Could Cisco have crafted its own Fibre Channel product line for a fraction of that total? Of course. Could Cisco argue that the start-up's intellectual property belonged to Cisco since the start-up began at Cisco and, er, worked at Cisco? Yes. So why did shareholders essentially pay these guys hundreds of millions for products they already owned? And why is Cisco paying the same group again?
One could see Cisco's spin-in strategy as a creative and rather intelligent way of running its business. We can't think of any major IT players that use this spin-in method as effectively. So, perhaps it's a competitive advantage.
Still, the financial terms of the deals coupled with the repeating themes do seem disconcerting. As a giant with billions on hand, Cisco should have an incredible amount of leverage on its side. One wouldn't think that Cisco could avoid such oddball deals.
Chambers has long pushed to establish more consistency and efficiency across Cisco and has developed a model company in that respect. So, it's sad to see such waste and inefficiency from the A&D team.
Unless, of course, that's the plan.®
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