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CASE NUMBER: HR-10

OCTOBER 27, 1998

Cisco Systems:
The Acquisition of Technology is
the Acquisition of People
"I learned early in life there might be people smarter than you, but if you have a combination of skills and
strategy, you can beat them."
John Chambers
CEO Cisco Systems

"One of Cisco’s core strategies for growth is acquisitions, and one of the primary purposes for
acquisitions is for the engineering and R&D talent."
Barbara Beck
VP Human Resources

"Cisco is among the rarest of Wall Street birds: an internet-driven company with a proven business plan,
actual products and ample profits.
Lee Gomes
Wall Street Journal, 7/20/98

Cisco Systems is a $6 billion high technology stealth company, largely unknown to the
general public. Insiders joke that Cisco is often confused with Sysco, a huge distributor of
foodstuffs for restaurants. Yet, it is the fastest-growing high technology company in history and
the third -largest company on Wall Street. Its CEO, John Chambers, gets little of the attention
paid to bigger stars of the high tech world like Bill Gates, Larry Ellison, or even Lew Platt of HP.
But if you had the prescience to invest $1,000 in Cisco stock in 1990, you’d now be walking
around with roughly $100,000. How did this company, with unglamorous origins making routers
for computer networks, become the worldwide leader in networking for the internet--a company
referred to in a recent article as "the Godzilla of datacom"? The answer is found in a unique
approach to a technology business that is based on people, frugality, and attention to customers.
It is a success born out of a winning HR approach that adds real value to the business. If
executives at Cisco have their way, in the next decade this approach will change the so-called
Wintel duopoly of Microsoft and Intel into a Cisco-based triopoly, Wintelco.

This case was prepared by Professor Charles O’Reilly as a basis for class discussion rather than to illustrate either effective or
ineffective handling of an administrative situation. Support for this case was provided by the Human Resources Initiative of the
Stanford Graduate School of Business.
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Cisco Systems: The Acquisition of Technology is the Acquisition of People HR-10 p. 2

Background
Cisco was founded in 1984 by Leonard Bosack and Sandy Lerner, husband and wife
academics at Stanford University who invented a technology to link their separate computer
systems together. With venture funding from Don Valentine at Sequoia Capital and a new CEO
in John Morgridge, Cisco went public in 1990 and today is one of America’s great success
stories, with revenue growth nearly a hundredfold in seven years (See Exhibit 1 for financial
information). Cisco’s current market capitalization of over $100 billion is larger than that of
General Motors. Cisco reached this level in only 12 years--it took Microsoft 20 years to attain
the same level. The company was also ranked 25th in Fortune’s "100 Best Companies to Work
For in America" and has a voluntary attrition rate among employees of only six percent--low by
most standards but extraordinary in Silicon Valley. In 1998, it has more than 13,000 employees
operating in over 54 countries around the world. Its products enable computers to communicate
with each other, offering customers end-to-end scalable network solutions.

Networks are one of the least sexy businesses in the world. They consist mainly of
routers, switches, servers, and software which comprise local area networks (LANs), wide area
networks (WANs), and the remote access network. Initially the development of computer
networks resulted in the formation of hundreds of small firms each seeking their own niche.
Cisco began by offering high-end routers and competed primarily in the LAN market. These are
the stand-alone boxes that scan network traffic and send it along to the proper address. However,
in 1993 Cisco changed its strategy and began to diversify into other network markets and
technologies.

Over the past decade it has migrated aggressively into end-to-end service across the
markets. Competitors followed similar strategies with LAN firms like Cisco acquiring WAN
providers like StrataCom and WAN players like 3Com purchasing an internet access firm like
U.S. Robotics. This has resulted in a smaller number of medium to large firms like Cisco, 3Com,
Bay Networks, Cabletron, and Ascend as the dominant players in this industry (Exhibit 2 offers a
simplified schematic of this market).

This transition has been accelerated as customers who rely more heavily on networks
demand not only product innovation and quality but also service and reliability--something
smaller competitors were unable to provide on a consistent basis. For instance, a Fortune survey
of 1000 companies revealed that 40 percent of respondents said that they would like a single
supplier to provide all their networking hardware.

The good news for Cisco is that about 65 percent of all LANs now use Cisco routers as
well as the company’s network software. This installed base provides an invaluable source of
repeat business. The bad news is that growth in this segment has slowed to about 20% as
compared to 100 percent in switches and other parts of the network market, with many
technology experts arguing that the heyday of routers is over. Indeed, a newcomer to the field,
Ipsilon Networks, has introduced a technology that reduces the need for routers to translate
between disparate networks, leading one industry analyst to note that, "Ipsilon itself isn’t that
important. They could go out of business in 12 months and nobody would care. But the ideas that
they are releasing into the market could impact Cisco." Developments like this have led some
industry observers to claim that Cisco has reached its zenith as a company, and that in a

"Three years later." But becoming a true one-stop shop for networking solutions in the face of continual technological change will not be easy. they had missed important opportunities. "Our conservatism was one of our strengths--we’re more than a bit paranoid. we began looking at every quarter and adjusting our plan up or down. consider the experience of Bay Networks. unlike some industries in which product development may take years. it must buy its way into the market or miss the window of opportunity." There was also a concern with the increasing pace of change--from calendar years to internet years. These developments highlight the need for Cisco to be flexible in its strategy and technology. Cisco recognizes that if the company does not have the internal resources to develop a new product within six months. How can Cisco simultaneously adapt to short-cycle. Second. two companies of about equal size merged to become Bay Networks. that we were going to attempt to shape the future of the entire industry. replicating the decline of DEC and Wang of an earlier generation. For example. "we made the conscious decision." He went on to note. 3 simplified switched network world. Chambers and his senior team realized that as fast as they had grown up until then. switching was the biggest threat to Cisco. and the company has lost ground to Cisco that it may never recover. and do this without losing control or adopting the micro-management that will kill the entrepreneurial culture they have developed? Chambers puts it succinctly. The new firm is still suffering. They concluded that their earlier conservatism had cost them at least 20 percent in growth that they could have had if they had been more aggressive. But to do this and avoid the usual pitfalls of most mergers and acquisitions will not be easy.. rapid change. Chambers says that "instead of looking at a one-year plan. "The truth is that nobody knows what it’ll take to win in the future. We decided to play very aggressively and truly attempt in the networking industry what Microsoft did with PCs . Based on this realization." Competing on Internet Time Growth Through Acquisitions In 1993. California- based Synoptics and Massachusetts-based Wellfleet. In 1994. in the computer network business the average product lifecycle is estimated to be 18 months on the hardware side with a product half- life of only six months for software. Two major challenges confront Cisco. where each calendar year is equivalent to seven internet years. CEO Chambers has a simple response to these criticisms about a lack of clarity in Cisco’s strategy: "We let our customers decide. the combined entity was bigger than Cisco. Now they’re the leader" in this market segment. for example. Chambers noted that when this merger first took place. The combination of two coasts and two cultures has created one large mess. mergers and acquisitions often fail. we are three times their size. Cisco will be relegated to the status of a legacy supplier. an industry rule-of-thumb is that each new product solution should offer twice the speed at the same or less cost. one industry analyst observed that "Three years ago.Cisco Systems: The Acquisition of Technology is the Acquisition of People HR-10 p. Worse." In this environment.. grow to offer the scale and scope customers demand. First. in spite of their attractiveness as a source of technology. one of Cisco’s major competitors. Commenting on this. But you always want to balance this paranoia with the confidence and ability to move forward. effectively integrate new acquisitions without losing critical intellectual capital.

terrible investment. Chambers and his team adopted a philosophy of breaking up markets into segments. you stand a very good chance of stalling both of them out. partnering. In our industry. for a period of time.Cisco Systems: The Acquisition of Technology is the Acquisition of People HR-10 p. and distribution needs for each market segment and a way of getting these products developed and sold--whether . In reflecting on the decision not to seek out a merger of equals. This is an average of an acquisition of one firm per quarter over the past five years. where you are acquiring branch banks and customers." To do this required them to move out of their "religious" technology mind-set into a non-religious view of technology that acknowledged that customers were the arbiters of choice. Currently this matrix is used to assess 16 plus separate markets. you have made a terrible. The Planning Matrix Since the market moves too quickly for all innovation to come from within Cisco. or OEM) for each line of business to permit the identification of opportunities for market leadership--with market leadership defined by Chambers as an initial 20 percent share with an eventual 50 percent share. And if you don’t keep those people. services. early feasibility studies lead to decisions about whether a product is to be developed in-house or to acquire the technology through acquisition. If the decision is to acquire a technology. So we focus first on the people and how we incorporate them into out company. Our industry is not like the banking industry. One of the key tools resulting from these rules was the development of a planning matrix to analyze emerging markets. and then we focus on how to drive the business. no matter how smoothly they operate. you are acquiring people. 4 and IBM did with mainframes. When you combine companies. Using the General Electric mentality of being either the #1 or #2 player in each segment led them to a set of strategic guidelines for Cisco: x The use of business units to target specific market segments x The importance of being either #1 or #2 in each segment in which they compete x The definition of a set of criteria that could be used to determine the suitability of an acquisition x The reliance on empowered teams and programs to increase the speed of assimilation of the acquired company x The notion that the acquisition of technology was the acquisition of people. This matrix uses a grid of markets by source of innovation (internal development. Drawing a lesson from Hewlett-Packard. product planning moves to the next phase and a well-specified development process is followed. Their initial approach to acquisitions began with an acknowledgement that most mergers and acquisitions are beset with problems--with some studies suggesting that over 50 percent of mergers fail.. That’s a fact.. Chambers noted "If you merge two companies that are growing at 80 percent rates. A determination is then made of the products. Cisco has acquired 24 companies (see Exhibit 3). If the decision is to develop in-house. Since 1993. the next step is to involve business development to determine the most appropriate acquisition target. This quickly led them to the decision to acquire new technologies. you lose business momentum." An awareness of the frequent failure of mergers and acquisitions has prompted Cisco to devise an approach that would help maximize success. acquisition.

the ideal candidates look like an early-stage Cisco and are referred to within the company as "Cisco-kids". vice president for business development. slow moving firms or from turnaround candidates. or a lack of honesty. The Business Development Process Charles Giancarlo. For instance. "I’m still running an operation whose mission is managing lives and technology. To assure this. manufacturing. senior vice president of business units. Any target candidate must have the requisite "great" technology that can be turned into a definitive product within six months. Cisco will never engage in a "hostile" takeover. cofounder of both 3Com and Grand Junction Networks. "What they’ve given me instead is the chance to kick our products through the roof. through joint development. Selby Wellman. aggressive. Their employees are more motivated by developing "cool" technology than by monetary gain. This team of 50-60 people continually analyzes new markets and technologies for their fit with Cisco’s strategic plans. 5 internally.Cisco Systems: The Acquisition of Technology is the Acquisition of People HR-10 p. these are often done by engineers who started with smaller firms acquired by Cisco. I don’t worry about having enough R&D money to keep up with the big boys. have a shared vision. "From this perspective. Lack of this fit. heads up Cisco’s merger and acquisition unit. This means all people must be fully informed throughout the acquisition in order to avoid negative surprises and maximize retention. Cross-functional teams (engineering. In doing this. including those areas where Cisco is currently not playing or is lagging the market. Giancarlo always insists on having leaders from the various business units involved in the negotiations because an acquired company must be embraced by an internal group "or it will flounder and die. They shy away from old- line.. marketing) follow the product from final design to manufacturing to first customer ship. or acquisition. now an SVP at Cisco. but there is continual pressure to reduce costs. Howard Charney.g. Manufacturing efficiency isn’t an important measure for product success with roughly 80 percent outsourced. results in a decision on Cisco’s part to seek other candidates. The group is comprised of finance and human resource personnel and supplemented by business unit leaders and technology specialists. the entire acquisition process must be characterized by honesty and trust--both before the acquisition and after. Senior management oversight of technology development and product release is done through monthly "Technology Forum" meetings. focused. This early success also sets the stage ." He says. the recognition is never lost that the acquisition is not of technology but of people--and that all efforts must be made to retain this pool of talent if the acquisition is to be successful. These decisions are then used to fill in the matrix. This process also serves as a new engineer boot camp to augment interaction between engineering and manufacturing. says that while he misses some of the control he enjoyed before the acquisition. entrepreneurial). left 3Com because of the politics but stayed when Grand Junction was acquired. We are the big boys. but I don’t worry about cash flow. all products in the pipeline are reviewed with manufacturing present." Adhering to this approach helps guarantee a quick win for both the acquired company and Cisco and further cements the embryonic relationship. says that although 70-80 percent of Cisco’s products are developed in-house." Typically this process results in the identification of a small technology-driven firm with between 60-100 employees whose product has not yet hit the market. In many respects. and be culturally compatible (e. At these meetings.

because trust is everything in this business. Cisco’s first acquisition. But this unit now provides over $500 million in annual revenues and is worth more than $4 billion to the shareholders. and (5) reasonable geographic proximity. adds "we try to establish an environment where we are attractive to small. Cisco has made a number of decisions not to go ahead with an acquisition because of a determination of a lack of cultural fit. This is typically followed by an exchange of documents on technology and human resources. ’We’ll change everything. "When we acquire a company. (2) the likelihood of a short- term win-win for both the acquired company and Cisco. Typically. the Cisco team constantly screens the target against the following five principles: (1) the presence of a shared vision." Chambers says that "We’ve learned that to make it [the acquisition] successful. Crescendo. Selby Wellman is direct in saying. stressed that you cannot overemphasize the importance of chemistry in determining the suitability of an acquisition. Again. Throughout the acquisition process. A Booz. They also look for how flexible the target firm’s managers are in the conversation and how widely they share their equity within the company. In the Cisco experience. the business team believes that these conditions exist. Part of this assessment process is based on what information the target is prepared to share or not share. innovative companies. Adhering to these guidelines. (4) the right chemistry or cultural compatibility. we don’t tell them. excessive secrecy may signal a lack of openness and honesty." This direct approach seems to work well enough so that venture capitalists and entrepreneurs now often seek out Cisco as a primary exit strategy. You have got to tell them early so you don’t betray their trust later. 6 for the long-term wins. director of human resource development and a key player in the integration of new acquisitions. Ordinarily this exchange takes about two weeks. Beau Parnell. Success at this stage results in signed employment agreements with the top team of the acquired company. "we won’t do a deal if the candidate company has accelerated vesting" of stock options. a four- year return of 430 percent. Once a decision is made to continue negotiations. they all get rich.’ We say. When. these consist of two-year non-compete agreements with key executives and technical personnel and the provision of Cisco stock options that vest over time. the business unit team leader sponsoring the acquisition must approve the candidate for the deal to proceed. you have to tell employees up front what you are going to do. notes that this approach is also an effective way for Cisco to retain people. Cisco’s Chief Technical Officer. after due diligence. Chambers volunteered that . For example. says Giancarlo. We prefer ’golden handcuffs.’" he says. VP of Business Development. they "caught unbelievable heat in the press" for making this purchase. an unwillingness to share the equity may signal a misfit for Cisco’s values Similarly. Mike Volpi. "The minute you buy the company.’" But Ed Kozel. Allen & Hamilton report shows other Cisco acquisition returns ranging from 10 percent (Nashoba) to 466 percent (Newport). ’We’ll leave you alone. cost $89 million in 1993 for a company with only $10 million in revenue. With these "golden parachute" provisions. The process of due diligence begins with informal conversations between senior Cisco managers and the CEO and senior team of the target firm. (3) a long-term win-win for all parties. During this process Cisco sets up a "war room" and the acquisition team works extensively to assess the fit of the target for Cisco.Cisco Systems: The Acquisition of Technology is the Acquisition of People HR-10 p. Chambers said that at the time.

" The HR Screen Mimi Gigoux is a director in the corporate acquisitions group responsible for due diligence on the HR side. the formal deal is closed quickly." meaning that time to market is more important than getting things completely right. It really does. her due diligence uncovered $60 million in uncovered pension liabilities--more than the actual price of the company. In one acquisition. That’s why we take such a disciplined approach. it would be very difficult for Cisco to retain key engineers. This was changed and the acquisition was completed--and the engineering talent stayed.. Integrating New Acquisitions Once the deal is approved. the final details and formal arrangements such as price are worked out. The subtext for this process is captured in a Cisco saying about acquisitions and product development: "Early if not elegant." For instance. the market might not exist anymore. Over 70 percent of the senior managers from acquired firms are still with Cisco. This makes good sense in a world of 18-month product lifecycles where if you’re late. You can get caught up in winning the acquisition and lose sight of what will make it successful. and cultural fit issues. 7 "We’ve killed nearly as many acquisitions as we’ve made. Gigoux periodically follows up on their retention rates. Chambers instructed the business development group to take all possible actions to retain all personnel. Underscoring the importance of speed. In her latest calculation. an acquisition discussion was well underway with seemingly good fit around the technology and product when she discovered that. the goal is to ship the acquired company’s product under the Cisco label by the time the deal is closed. I vowed I would never do that again to employees or shareholders. In most acquisitions. She notes that these are topics that are highly visible in the early stages of discussion since the key personnel at the target company are often far more concerned about their own future than they are the actual acquisition price of the firm. In another instance. Her activities begin before a decision is made to acquire a company with a careful scrutiny of management styles.000 people.. .Cisco Systems: The Acquisition of Technology is the Acquisition of People HR-10 p. Chambers wouldn’t acquire the company knowing that they would have to lay off the employees. 13 percent.even when they were very tempting. This offers her a window into their style and the operating basis of the company. once Cisco had a chance to acquire a company on great financial terms. because of the amount of honest communication and mutual sizing up that has occurred. While at Wang "I did five layoffs totaling 5. because of the stock distribution arrangements. I believe it takes courage to walk away from a deal. Chambers passed on the deal because he knew that they would not need the employees after the initial product was absorbed into the Cisco line. the turnover rate for acquired personnel is identical for the Cisco population as a whole. Part of the success of the HR screen can be seen in these retention figures. usually within 3-6 months. These are people who often have multiple start-ups under their belts and substantial personal wealth. although the senior management and key technologists are most important. organizational structure. It nearly killed me. But even though the price was right and there was even a fit on chemistry. But her follow-up studies show that they stay because they now have the corporate resources and backing to back their dream projects.

product. ensuring that new insights and refinements are added to the acquisition process. tuition reimbursement. have office space and free soft drinks. They also act as a source of institutional knowledge and learning. the focus shifts immediately to integrating the new company into Cisco as quickly as possible. benefits. She pulls no punches. marketing. etc. 90. Mimi welcomes new employees with an acknowledgement that change is painful and-- like taking off a band-aid--they’ll do it fast. 60." But she also points out the plentiful good news. As one member of the business development team observed. Her goal is complete honesty. This process has been refined to the point that it usually takes only two to three months to occur. informing people that this was an acquisition. This group is comprised of employees who themselves have come from an acquired company and have experienced the process themselves.. service. career opportunities." .. structural and cultural. with smaller acquisitions being completed in as few as 10 days and the largest. This process serves both to ensure the accomplishment of specific tasks and to begin the process of bonding between old and new Cisco employees. increased vacation days. the engineering. Some people don’t fit. the better it will be for you. and 120-day milestones so that there is no loss of productivity. e. 8 With a final agreement. This integration takes place at two levels. manufacturing. information systems. not a merger of equals. and the assignment of "buddies".g. These teams are composed of Cisco employees and members of the new unit who are chartered to perform specific tasks. and distribution are merged into the Cisco infrastructure. There is also a careful effort to assess and track 30. and get immediate training in the Cisco way. logistics) act immediately to see that new employees are up on the intranet. compensation. This does not mean that all employees of acquisitions stay with Cisco. Special orientation sessions involve employees from previously acquired companies who offer their insights as well as change management sessions to assist the people within the acquired firm in supporting the transition. The "buddy" system involves pairing each new employee with a seasoned Cisco veteran of equal stature and similar job responsibility. with 1200 employees. In the early stages of the transition all integration processes are monitored and controlled by project management. noting to the new employees that "The more flexible and positive you are. taking only four months. ensuring that the new company isn’t overrun by 12. orientation sessions. "Cisco isn’t for everybody. In a typical acquisition. retention plans.000 Cisco employees who are fascinated with the new company and want to "help. and sales units will be integrated into the sponsoring business unit while human resources. Cultural integration includes the use of integration teams who explain and model Cisco’s values. The structural part includes the organizational rearrangements needed to assure operation of the business functions and rationalization of functions such as payroll. there is a "lessons- learned" review designed to improve the acquisition process for the next iteration. The buddy offers personalized attention better suited to conveying the Cisco values and culture. She also offers a first lesson. This is made easier since more than half of Cisco’s employees have been hired within the past four years and have a culture of welcoming new members with little "insider versus outsider" attitudes. Integration teams (e." At the conclusion of this process.g. MIS. During this phase Mimi acts as a conduit.Cisco Systems: The Acquisition of Technology is the Acquisition of People HR-10 p. and other services.

" In fact. Volpi points out that acquisitions not only bring in the obvious technical talent but also is an important way to bring in scarce managerial talent--a critical element in a fast-growing company." In arguing why the guidelines are so important. with Cisco’s marketing. Giancarlo notes that retaining the leaders of the acquired firm is critical since "If you don’t retain executive management. He stays because of a desire to build breakthrough products that.Cisco Systems: The Acquisition of Technology is the Acquisition of People HR-10 p. He also stays because "Most people at Cisco came from start-ups. however. and distribution." This means focusing on acquisitions with high potential products that are close to being ready for the market. Ed Kozel says that Cisco looks for companies with leading edge technologies in growth markets and defines Cisco as an "applied technology [company] and not a basic research company. like Andy Bechtolsheim. To date. We have a generic process." Upon reflection. Cisco was unable to leverage Kaplana’s value-added-retail channel for its own purposes and the academic culture at Lightstream didn’t blend well with Cisco’s pragmatic business culture. can change the world. described their performance in acquiring Kaplana and Lightstream in October of 1994 as a case in point. several elements of Cisco’s experience with acquisitions are seen as key. 9 Even Chambers is clear when he claims that Cisco’s goal is "to hire the top 10 percent of the people in the industry--who fit the Cisco culture. came to Cisco when his start-up Granite Systems was acquired in 1996. sales. Volpi says. He is optimistic. Second. First. the focus of any acquisition is driven by a clear identification of specific technology/product needs as identified in their strategic matrix . Still. he believes that they would make the same decision again since these companies helped Cisco temporarily fill a product space until subsequent acquisitions were made. We do them to grow the company in the right direction." That is why this selection process is crucial for successful acquisitions. who was a founder of Sun Microsystems. Mike Volpi. you don’t retain the rank and file. have been successful. We spend a lot of time on the up-front." Since the purpose of any acquisition is to retain people and their intellectual capital. Not all acquisitions. who came to Cisco as a part of a 1994 deal and had founded several other companies says. "If you are selecting a partner for life." Others. your ability to select the partner after one date isn’t very good. the vision of the leader of the company being acquired and the direction they are headed must be compatible with . "Cisco is able to hold onto people like me because they gave me a chance to play a major role. so the place has a small-company mentality." Research by Acquisition? The importance of retention is underscored by the objective for each acquired company to generate revenues within three years that will pay for the acquisition. "We have the process down. the processes are designed to empower and retain people. he likens the process to marriage. all acquisitions older than two and a half years have met this criterion. But the acquisitions are not financial--we don’t do them because we can swing a good deal--they are strategic. VP of business development. "If you don’t spend a fair amount of time on the evaluation of what are the key ingredients for that. half of the chief executives and most of the senior management of the companies acquired since 1993 are still with Cisco. Giancarlo. Sometimes in all this speed we end up paying too much. your probability of having a successful marriage after one date is pretty small.

10 Cisco’s. Cisco’s Strategy. Fourth. a 1996 acquisition. "I learned at both companies that in high tech. In fact. people must recognize that only one culture can survive. "I know that sounds corny. Almost embarrassed. self-effacing manner that has been described as having less CEO-style bravado than the cheerful. "My definition of leadership is: don’t ask someone else to do something you wouldn’t do. when asked why the senior management of Cisco was becoming more high profile. we made the decision as a team that we wanted to become much more visible." He is an admirer of Hewlett-Packard as a company that has transformed itself over the years.and long-term wins for the stakeholders in both companies. "They are fine people. he joined Cisco in 1991 after stints at Wang Labs. Cisco and StrataCom are both entrepreneurial. Chambers acknowledged that after studying Microsoft "We realized that it gets most of its marketing for free.S. and chemistry. that really appealed to us.000 and $2 million per employee. observed that." especially as "a textbook example of the vertically integrated company that didn’t change with the times. Noting his experience at Wang. you should back away. what role each company wants to play --you are constantly going to be at war. For example. former President and CEO of StrataCom. Short- term is typically defined in financial terms. who will be the leader of the combined operation and to whom will this person report? Fifth. fast-growing Silicon Valley companies that thrive on the dynamic networking market. Chambers says. noting his West Virginia accent. there is a need to set very clear expectations as to how the merged entity will function." he said. "In addition to having complementary technologies and a shared vision of future networking architectures." He has also learned important lessons from his time at IBM and Wang." Chambers says." Third. There’s an excellent fit of cultures. So you have to look at the visions of both companies and if they are dramatically different. once described him as talking "like Mister Rogers on speed. As a result. Finally. and has been known to double up in hotel rooms to save money." The fact that Cisco is a player in all the hot network technology areas makes it attractive to the employees of acquired firms. and business partners. there must be short. Operations. earnest energy of a country doctor--something both his parents were." Since Cisco pays between $500." He is a charismatic but modest leader who carefully watches the bottom line. must also benefit. shareholders.Cisco Systems: The Acquisition of Technology is the Acquisition of People HR-10 p. if you don’t stay ahead of trends. Organization and Leadership John Chambers John Chambers. one admirer observed that this "taught him how a high-tech company ought not to be run. the economic rationale for retaining these assets is clear. I don’t ever want to go through that again. "They adjusted their vision to what the market required. They’re what we’d like to be when we grow up. always flies coach class. has an energetic. Says Chambers. where he had been senior vice president of U. For instance. Cisco’s CEO. they’ll destroy everything you work for and tragically disrupt the lives of your employees. transitions must be done quickly. values. employees. In the long-term all constituencies. customers." He also claims that he bases his strategy on what his father taught him as . and they flourished. Leaving acquisitions alone doesn’t work. "If your visions are not the same--about where the industry is going. A Fortune writer. and IBM. but it is true." With both business and law degrees.. Dick Mobley. Since we’re a frugal company.. They make agreements on a handshake.

In some instances." Another Cisco executive. This business model opens the corporate information infrastructure to all major constituencies rather than relying on the information gatekeepers common in other approaches to information management. current initiatives. values. interactive relationships with all its key constituencies. In applying this model to itself. improved customer satisfaction. and delivery times. My back arches and my fur goes up when I see us going down one of those tracks." In their view. product ordering. and offer customers a range of options from which to choose. But. and profitability. but their starting position with regard to customers is to espouse no technology religion. reinforces this view. but if you have a combination of skills and strategy. Or not being sensitive to people who are fast trackers but don’t quite fit. partners. A lot of companies lose sight of that. that is. Cisco does not have a technology religion. In doing this. Cisco espouses five core values: A dedication to customer success. Cisco’s philosophy is to listen carefully to customer requests. But boy." Cisco’s Strategy In contrast to many technology companies. policies and practices. Underscoring the importance of customer . you don’t recruit and develop the right people. "One thing that keeps Cisco healthy as we get larger is the fact that a lot of people on the executive staff have come from places that caused their own downfall. you can beat them. Teamwork. a 17-year veteran of DEC. Innovation and learning.Cisco Systems: The Acquisition of Technology is the Acquisition of People HR-10 p. product leadership." he says. for example. Or focusing on internal competition rather than the real competition. and culture of the company. technologies developed by Cisco have become the industry standard. There are three things that can get you fired at Cisco: no business results." says Ed Kozel." In 1996 Business Week magazine named him one of the "Hot CEOs" of 1996. Partnerships. market share. drives the entire organization. like setting up a committee to make a decision. monitor all technological advancements. 11 they played competitive bridge when he was a teenager: "I learned early in life there might be people smarter than you. Cisco’s Chief Technical Officer and Vice President of Business Development. and investors. purpose. Customer satisfaction." Their business purpose is: "To shape the future of global networking by creating unprecedented opportunities and value for our customers. "There is a one-to-one relationship between customer satisfaction and profitability. because some manager wants to grab it. Cisco attempts to develop products around widely accepted industry standards. it refuses to take a rigid approach that favors one technology and imposes that approach on customers as the only answer. employees. Cisco does over $7 million a day in electronic commerce--or over 57 percent of its total sales--and estimates savings of over $325 million a year in operating costs. and strategic competitive advantage in areas such as customer support. One executive seconded this view noting "He’s probably the most polite person in the world to fire you. he doesn’t hold back. or you’re not a team player. To achieve their mission and purpose. and Doing more with less. Or making it difficult for people to get recognition. "Employees don’t mistake John Chamber’s kindness for weakness. CEO Chambers constantly reinforces this view. Cisco defines their company mission to "Be the supplier of choice by leading all competitors in customer satisfaction. a global networked business is an enterprise of any size that strategically uses information and communications to build a network of strong. Each of these values is continually articulated and reinforced in the mission statement.

he strongly discourages directors and vice presidents from attending these meetings." says Chambers. I want to hear that person’s level of comfort with the strategy we’re employing. don't ever plan on making that same mistake twice." These values do not stand alone but are put in the context of executing the business strategy. Individuals are encouraged to think and respond as they consider appropriate and consistent with the company's values. "But I want to hear the emotion. the Chief Technology Officer. learn from that failure. Innovation and learning is another value that permeates the company. "You must take risks to succeed--if you do the same thing that everyone else has done in the same situation. The company's goal is extreme profitability through market domination. Nobody flies first class. every employee at Cisco is expected to be able to recite what the top initiatives are for the year. "But the fact that I pay attention to these issues at this level means that the whole company has to. Teamwork is also one of Chamber's most important themes and one of three things that can get a person fired at Cisco. 12 satisfaction as a core value. Chambers asks employees on critical accounts (defined less by the size than the fact that someone associated with the account is concerned about its instability) to leave a voice mail for him every evening. Maximizing return is especially difficult in light of the short product lifecycles that characterize Cisco's industry. There is no room in this organization for people who cannot learn from failure. To do this. The jump in ratings occurred the first year all employees’ bonuses were tied to how well the company was doing as a whole." In the mid-nineties. they're off my team. Cisco is still a hard-nosed realist when it comes to achieving business results. Therefore. whatever it takes. rapid adaptation is crucial for success. Chambers holds a monthly "birthday breakfast" meeting open to anyone with a recent birthday and answers every question put to him--no matter how tough the question. they have borrowed a page from GE's playbook and demand that every business be #1 or #2 in their specific market segments. Managers are expected to provide frequent updates on the status of initiatives and there is tremendous peer pressure to know what these initiatives are. "is the ." Further. A "not-invented-here" attitude isn't tolerated. "I’m probably the only CEO in the world in a company this size who does this. "We're very cheap. As Chambers says. "If people aren't team players." Now 85 percent of customers are satisfied." boasts Ed Kozel. They are encouraged to take risks and think outside the box--to look for new ways of doing things to achieve Cisco's strategic objectives. "Doing more with less" is deeply ingrained. e-mail would be more efficient. Says Chambers. you will get exactly the same result. roughly two-thirds of Cisco’s customers called themselves "satisfied. For instance. But make no mistake about it. there is no executive dining room. "One of our strengths. There is constant pressure from Chambers and senior staff to "make it happen". he personally reviews as many as 15 critical accounts each day. In spite of this idealism." says Chambers. often calling on customers himself to straighten out problems. To ensure that the questions and criticisms will be honest. if you take a risk and fail. I want to hear the frustration.Cisco Systems: The Acquisition of Technology is the Acquisition of People HR-10 p." Openness is also the rule with people encouraged to challenge the status quo. At the same time. And you can’t get that through e-mail. achieved as quickly as possible. It's more important to do and make mistakes than to sit back and wait to get permission. If you take a risk and don't succeed. "Sure. and executives brag about how much less their buildings cost than others in the Valley. To reinforce this." he says.

There are also frequent reorganizations to respond to changing markets. customers wanted more immediate solutions. Our aim was to drive our strategy down through the company. he claims that "It’s better to partner than to compete because it allows time-to-market advantages and. The key to success is having a culture with the discipline to accept change and not fight religious wars. it grows the pie bigger for everybody faster. In Chamber’s view. Service Providers (such as telephone companies). they realized that Cisco needed to act like a small company from a product development point of view while retaining big-company strengths in manufacturing. To ensure decentralization. Microsoft. We went through an evolution from a very tight central management group with four or five people making all the decisions to the empowerment of groups. "The companies that get in trouble are those that fall in love with ’religious’ technologies. they were organized by product lines. more importantly. Even though the future of their technology was very promising. There is also a direct sales force with LOB market focus and a centralized R&D function funded at the rate of about 12 percent of sales. senior management decided to follow Hewlett- Packard’s lead and organize by business units. "Partnering is our heritage. All component manufacturing is outsourced but there is a centralized final assembly and test manufacturing organization. At that time." For instance. HP. 13 ability to eat our young when the market grows so fast. Says Chambers. Cisco has entered into partnerships with MCI. but one that the customers were comfortable with. This led them to an independent market-focused organizational design based on line-of-business (LOBs) in three domains: Enterprises (large corporations such Intel and local governments)." Organization Design At the time of the 1993 shift in strategy." Arguing that networking is too complex for any one company to tackle. in 1995 Cisco acquired a company for $120 million. about the same percentage as rival 3Com. Cisco has adopted a policy of setting stretch goals--goals that people would never have thought possible--and making these a part of the culture. Alcatel." The overarching intent is to develop high-value added products that offer high margins. distribution. This decentralized structure also helps assimilate new acquisitions into relatively autonomous business units and gives Cisco the small company feel that is attractive to acquisition partners. and finance. this ability to scrap earlier efforts and move on is what separates companies like Cisco and Microsoft from the rest of the pack." With this philosophy. so it’s a huge competitive advantage. Postal Service among others.S. . Intel. since they believed that time-to-market was they key to successful domination of the market. and the U. Cisco scrapped the future and purchased another company with less advanced technology. Chambers described how "Rather than trying to do the impossible just by working harder--we asked: What are we going to do uniquely to accomplish our stretch goals? The first thing is to empower teams. Rather than wait for the customers to realize the value of the new technology. and Small/Medium Businesses (such as universities).Cisco Systems: The Acquisition of Technology is the Acquisition of People HR-10 p. Achieving high margins and profitability growth is key to Cisco’s continual investment in technology. Very few people in this industry partner well. The low levels of vertical integration increase Cisco’s flexibility to expand into new product lines. However.

If the boss walks by. Beck notes. and other places frequented by potential recruits." So how does Cisco develop this sense of ownership and loyalty? Human resource policies and practices are the key. smile.m. staffing. smile. It’s electronic heroin!" Another employee enthused. you won’t be able to leverage HR’s capabilities. Cisco is a high tech company and "If you don’t leverage the technology. Cisco’s ads feature their website address. there is little to differentiate Cisco’s HR organization from its competitors or other organizations of a similar size. the role it plays in helping execute the business strategy. by monitoring the Cisco website. and the impact it has on the performance of Cisco employees. Silicon Valley time. one of the tightest job markets in the country. training. Recruitment and Selection For the past several years Cisco has hired an average of over 1. To help facilitate this Cisco is developing software to make life easy for stealthy job seekers." His attempt to find something bad about working at Cisco met with comments from employees such as: "It’s addictive. If I screw up and the stock goes down. The simple logistics of identifying and processing the applications necessary to accomplish this feat is daunting. very good mechanics of a type that is peculiar to our age: they build the plumbing of the internet. You can work any 60 hours a week you want!" Some managers have even complained that a big problem is to convince employees to go home at night. whom he referred to as "Ciscoids. An illustration of this can be seen in the experience of a journalist from Wired Magazine who made the trek to Cisco to report on the experience of the employees.000 hits per month--with the heaviest load occurring between 10 a. etc. by holding focus groups with ideal recruitment targets. The journalist’s ultimate answer to the question. "The top 10 percent are not typically found in the first round of layoffs from other companies. But the Cisco Human Resource staff is up to the challenge. It will let users click on pull down menus and profile themselves in 10 minutes. they realized that their jobs page recorded over 500. "If I do my job right it will support the stock." This means that the HR strategy for recruiting relies heavily on the Internet. development. 14 Human Resources In terms of its formal structure. This meant that people were trolling for jobs on company time. It can take over your life if you let it.g. Next. they figured out where they spend their time and how they do their job hunting. Then the team got innovative in designing the hiring process. the recruiting team identified exactly the kind of people they needed to hire. "You get amazed at your own productivity. And all they do is smile. microbrewery festivals. Said one employee.).m. he wrote that Cisco employees were "basically very. As Barbara Beck notes. users can hit a . and it all begins with recruiting. They also take the stock price personally. Why are these people smiling?: They all believe that it’s a great place to work--and they’re all getting rich from stock options. including infiltrating art fairs.. First. Their staffing ratio of about one HR professional per 70 employees is lower than some of their competitors and not as efficient as VP of HR Barbara Beck would like it to be. and 2 p. Rather than listing specific job openings. people will come around and beat on me with hammers.000 new employees every three months--and it has done this in Silicon Valley. First." After spending some time there. and they usually aren’t cruising through the want ads. There are the usual functional and line HR organizations (e." Besides. The real difference in how HR contributes is in how it acts.Cisco Systems: The Acquisition of Technology is the Acquisition of People HR-10 p.

For instance." To do this he created the Fast Start program. if all Cisco did was pay employees for referral. To really involve potential recruits. the ultimate success rate for retaining employees would suffer. The day after she did this. however. Managing the Culture Given the importance of Cisco’s values for continued success." The real power of this website. 15 button that activates a screen disguise--changing it to "Gift list for Boss and Workmates" or "Seven successful Habits of a Great Employee. from 30-50 percent of all resumes are submitted electronically and automatically routed into a database that can be accessed immediately. a printed circuit board designer at Cisco called her at home and talked about life at Cisco." But the technology part isn’t the full story. Two weeks after they’ve begun." His personal mission is to help Cisco achieve "the fastest time to productivity for new hires in the country. Michael McNeal. calls a new employee’s first day "the most important eight hours in the world. We’re working very hard to stay ahead of the technology curve and have an extremely sophisticated human resources organization. and it’s making it easier for everyone to use HR services. The day they make the referral they also become eligible for prizes like stainless steel commuter mugs. It allows us to add maximum value. the darling of disenfranchised programmers. when Dawn Wilson. In explaining why previous mergers among large technology firms have failed. and trips to Hawaii. has assigned a "buddy" (a peer in the company) who can answer questions about how Cisco works. It’s facilitating communication. she clicked on the "make friends @ Cisco" button and was swept into the recruiting pipeline. To rapidly turn new employees into motivated and productive employees requires the same sophistication in the orientation and indoctrination process. As a result. Focus group results had shown that referrals from friends were a powerful factor in the job search process. the site allows visitors to their website to pair up with a volunteer "friend" from within the company. a printed-circuit board designer at Tandem Computers was surfing the Cisco website. Chambers says: "If you look at AT&T and NCR. Small wonder that referral rates at Cisco are twice the industry norm. Importantly. Beck claims "Going online has provided us with a tremendous boost in productivity. the acquirer did not understand that it was acquiring ." For example. And every time a referral is hired. Having a "friend" made the difference. the new hires boss receives an e-mail reminding them to review departmental initiatives and personal goals with the new employee. is that it actively targets passive job seekers by making it fun and easy to match personal skills and interests to job openings. and Cisco has done this. she accepted a job--even though she had been at Tandem for 11 years and was not really looking to leave.Cisco Systems: The Acquisition of Technology is the Acquisition of People HR-10 p. He referred her to his boss and a few days later she had a relaxed visited to Cisco. a collection of employee-orientation initiatives that alerts facilities teams before the new recruit arrives so that the employee begins with a fully functional workspace. After a minimum of five interviews. athletic bags. HR also ensures that the culture is aligned with the business strategy and continually reinforced. Clearly. the Cisco employee gets from $500-1. Chambers claims that about 60 percent of the people who join Cisco join because they have a friend there. Cisco’s director of employment designed this effort to "put some grace into the hiring process. and enrolls the new hire in a two-day course called "Cisco Business Essentials" that begins the indoctrination. Beau Parnell. to attract applicants. director of human resource development. the Friends Program is key. Cisco is also linked to the Dilbert Web page.000. or IBM with ROLM.

Cisco Systems: The Acquisition of Technology is the Acquisition of People HR-10 p. if you are not careful about the selection process. senior management get cubicles in the center of the fluorescent-lit pool while employees get the windows--but all offices are the same 12 feet by 12 feet." The culture and values are also reinforced through the way jobs are structured and managed. empowerment. Like any good Silicon Valley company. The culture and values are also emphasized in communications through the company intranet. Chambers is paid $250. Or worse. and automobile oil changes and mobile dental clinics with appointments made via e-mail. then the odds are high that your acquisition will fail. Another adds that "when there’s a problem. ATMs. with all . Stock options are distributed generously. Barnum & Bailey or Cirque du Soleil for other events and provide the usual complement of other employee-friendly services such as on-site stores. The fact that most acquisitions involve the replacement of local stock options with Cisco options is a big selling point--given that Cisco shares have split five times since 1990 and doubled in value in 1996 alone. Company bonuses are also generous. and the average employee who has been with Cisco for over a year has over $125. Management salaries are about 65 percent of the industry average.. If you don’t have a culture that quickly embraces the new acquisition. To reinforce the culture a variety of mechanisms are used to relentlessly communicate the values. anybody can give anybody else an on-the-spot bonus ranging from a free dinner to as much as $5. That’s on top of an average starting salary of about $70. it’s all "hot desks" or "non-territorial" office space. "I don’t have to get permission on every little thing. it’s put more as a question to the team--a challenge. To encourage the use of these.000 in profit on unexercised options. fitness centers. recognition. with the approval of the boss. rather than dictating the task." Chambers believes that part of the reason for this is that acquisitions are left too independent for too long. unlike Dilbert-land. As one employee said. Individual contributions are widely celebrated around the company. they know they are going to be combined and political warfare sets in.. 16 people and a culture.000 for going the extra mile--and these can be approved within 24 hours. Cisco also has parties--including a Christmas bash with 100 food stations and entertainment ranging from Elvis imitators to psychics. I have a very Cisco-centric view of the world. Quarterly "all hands" meetings are held to communicate the big picture and to make sure everyone feels included. Aligning the Reward System The reward system is also carefully aligned with the strategy and values of the company. Mimi Gigoux said. the annual performance review includes an evaluation of whether supervisors have spent their reward budget. Micromanagement is rare. For Cisco employees in sales offices there aren’t even assigned spaces. and removing barriers to creativity. dry cleaning services. Attempts are made to create an exciting environment through high levels of motivation.000. This is seen as becoming more important with growth and inevitable compartmentalization." says one employee.000 as chairman. with a full 40 percent of all Cisco stock options in the hands of individual employees without managerial rank.000 and former CEO John Morgridge earns a mere $50." For example. "Never in my life have I seen such consistency in recognition. They have also hired Ringling Bros. it’s become a part of my life. especially the people I work with. There’s no time for it." At Cisco. But executive salaries are only about 25 percent of the industry average. It would be difficult for me to go to [a competitor] at this point because I feel a part of Cisco. with webcasts of important events delivered to desktop computers.

and internal turf wars as sapping Cisco’s future potential. these acquisitions also provide the acquired company and its employees with new sources of funding. notes that "We also have ’Mutual Separation Policy’. one-third of each employee’s annual bonus is linked to the achievement of a predetermined level of customer satisfaction assessed through regular surveys. The same is true for HR. I don’t know that many engineers who would want to work someplace else. Since 1994. Janet Skadden." But. "The company is obsoleting its own products every six to twelve months. an HR director with overall responsibility for compensation. to sustain this edge. added market share. 17 employees receiving stock options when they join and most getting annual renewal grants. and picking the right strategic partners. director of human resources. Unless executed flawlessly. the late delivery of new products and upgrades. a wellspring of experience. It is easy to see how this approach to innovation could fail. systematizing the art of acquisitions so that they can continue to ride the technology wave. "You’ve got to point to the management team. the people at Cisco understand that change is the only constant. a stream of mergers and acquisitions can lead to poor communication and coordination. to their smart investments. and large financial rewards. the development of new low-cost alternative technologies. But there are also considerable risks with this strategy. and the opportunity to move products to market more rapidly than might be done if all new products were developed internally. defining the software standards for network gear. "Other than a start-up." The Continuing Challenge To succeed in the future. overlapping technologies. says. access to scarce intellectual capital. They provide the continued source of new products and technologies. It cited lower revenue growth. . These are complex and risky tasks for which there are no guarantees and acquisitions remain the key. wasteful political infighting. When it works. a complicated product line. The voluntary attrition rate among employees is only six percent. One said. their speed of getting things done. nimble new rivals as well as the emergence of newly merged large competitors.Cisco Systems: The Acquisition of Technology is the Acquisition of People HR-10 p. distribution channels. Cisco’s strategy boils down to four elements: assembling a broad enough product offering to become the preferred one-stop shopping destination for wired businesses. Intel is also working to put the entire routing function on their microprocessors. and customer confusion. All this has led some industry observers to note that Cisco is almost a cult." Even a self-professed industry cynic acknowledges that they are a cut above the rest. But this emphasis on positive rewards does not mean that poor performance is tolerated. One insider reported that engineers were spending their time integrating acquired technologies rather than developing ground-breaking new ones. A recent Business Week article (4/28/97) detailed some of the challenges facing Cisco. which is like no-fault divorce. Headhunters acknowledge that it is nearly impossible to pry people out of Cisco." This is an aggressive severance package designed to help move out the bottom five percent of employees every year. the fact that they could spot what the next generation products would be. John Radford. There are also reports of Microsoft software that will perform the routing functions for PCs.

In achieving this end-to-end dominance. Cisco may need to evolve from being primarily a technology company to more of a sales and service provider. "We worry about getting too far from the customer because companies that get fat and happy get in trouble." But Chambers is optimistic. We make Andy Grove look relaxed. In 1997.Cisco Systems: The Acquisition of Technology is the Acquisition of People HR-10 p. "The markets have voted. A major concern among many industry observers is whether Cisco will be able to make this transition and integrate all their products into one cohesive. Innovation is key. "It’s that paranoia that keeps us on top. 73 percent of IBM systems network architecture. But Cisco has not yet faced any real adversity as an organization and the growth rate of the network market may mask problems with their approach that will only become visible during periods of crisis." Smiling. Chambers worries about this. Don Miller. 38 percent of frame relay devices. but making all this stuff sing together is difficult. 18 Future success requires continued flexibility and speed. Cisco’s market share of routers was 84 percent. and 35 percent of LAN switches. he says. but more as system integrators. an analyst at Dataquest. He says." The market seems to bear him out. we’re bigger than the next four or five networking companies combined." . Chambers believes that companies that will thrive in the internet economy are those with the ability to change before the rest of the world realizes that they have to change. it can be really confusing. I see IBM and Nortel [Northern Telecom] as our most likely end-to-end competition. They need to integrate and assimilate their products as soon as possible. this means they need to attract the best people and stay in touch with expanding customer markets. says "The company’s product catalog looks like the phone book." Others echo this view noting that Cisco’s problems are made more complicated by their lack of a unifying network platform such as those provided by their competitors. comprehensible family. "How do you really create a culture of mergers and acquisitions and new ideas and keep your basic strengths? How do you avoid creating the hierarchy where an overhead structure supporting your sales people and engineers becomes your bottleneck as you drive through it? How do you avoid getting too far from your customers? Do I think we could trip in the future? Absolutely. however.

19 Exhibit 1 Financial Data (1994-1997) 1997 1996 1995 1994 Revenue $6.54 Employees (approx) 12.0 bil $1.1 bil $2.Cisco Systems: The Acquisition of Technology is the Acquisition of People HR-10 p.72 $0.37 $0.000 9.2 bil $1.4 bil $4.000 .1 bil Net Income $1 bil $913 mil $456 mil $323 mil ROA 19% 25% 23% 29% ROE 19% 32% 29% 36% Income/common share $1.3 bil Assets $5.000 4.4 bil $3.52 $1.6 bil $2.000 2.

2 ‘.4 I . Exhibit 2 Cisco’s Market Segments C. r ‘.4.

1996 15. December. Inc.Cisco Systems: The Acquisition of Technology is the Acquisition of People HR-10 p. CLASS Data Systems May. LightSpeed International December. Skystone Systems. March. Netsys Technologies October. Telesend March. StrataCom. Global Internet Software June. Combinet. Inc. Inc. Inc. Nashoba Networks. 1998 23. January. Network Translation October. 1997 21. 1998 22. 1996 14. October. Internet Junction September. NetSpeed. June. 1995 9. 1996 12. April. 1997 17. 1993 2. 1998 . 1997 18. Newport Systems August. 1995 6. Crescendo Communications September. 1995 8. 1994 3. 21 Exhibit 3 Cisco Acquisitions Company Date 1. LightStream Corp. 1996 11. 1997 16. 1996 13. September. Dagaz Technologies July. Inc. Kaplana. August. 1994 5. 1997 19. 1996 10. Inc. 1998 24. Precept Software March. 1994 4. Granite Systems. August. WheelGroup Corporation February. Inc. TGV Software. Grand Junction September. Inc. 1997 20. 1995 7. Ardent Communications June. Telebit-MICA Technologies July.