Watch Watch IX (InfoXchange Video NewsLetter)
John Chambers said earlier this month at the Fortune Brainstorm conference in Aspen, Colorado, that he won't pursue consumer businesses at all anymore.
They have six rules for acquisition which are:
1. Share a vision. "Do you have the same vision of where industry is going as the target of your acquisition? If visions differ, you might get together economically for a while, but then you are going to have problems," he explains.
2. Corporate cultures have to match. "You know at the beginning. You listen to them: if [they] mention customers, if they share the success of the company with their employees, or just a couple of people at the top make all the money," he says.
Plus he looks for "a healthy paranoia," explaining, "That’s what Silicon Valley is about. We all know we can get unseated very quickly — as quickly as two years."
3. Know what you are really buying, the people and the tech. "Understand what you are acquiring and protect it at all costs," he says. "You are acquiring people and next-generation products. You are making an investment that together you can grow faster, make more profits, and take more market share."
If key people won't join Cisco, and the cultures are not similar enough to keep most of the employees, he won't buy.
4. The acquisition should be "strategic." He's looking for "a minimum target of 40% market share" and companies that have what he calls "sustainable differentiation" — meaning they have a unique technology not easily copied. And it also has to be profitable, "good industry-average margins."
5. The closer the location to Cisco the more successful the acquisition will be. "Geographic proximity is very important. Once you get out of the country, odds go down even more."
That's particularly interesting because at one point, Chambers threatened to stop buying U.S. companies mostly for the tax implications. He doesn't want to have to important off-shore cash for the transaction and pay taxes on that cash.
So is he looking for offshore companies to buy. "Still am," he tells us. "But it makes it harder. You just go with your eyes wide open. You also don’t also go with a company that doesn’t have 'sustainable differentiation' or with a culture that’s different."
6. Listen to your existing customers. "If you listen to them the right way, they’ll tell you who to acquire, they’ll tell you want you are doing right and wrong. They’ll tell you what your challenges are in the future" he says.--John Chambers