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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

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

In our industry. When you combine companies." An awareness of the frequent failure of mergers and acquisitions has prompted Cisco to devise an approach that would help maximize success. In reflecting on the decision not to seek out a merger of equals. That’s a fact. 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. Currently this matrix is used to assess 16 plus separate markets. A determination is then made of the products. And if you don’t keep those people. 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. product planning moves to the next phase and a well-specified development process is followed. Our industry is not like the banking industry. you stand a very good chance of stalling both of them out. 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. you have made a terrible. terrible investment. This matrix uses a grid of markets by source of innovation (internal development. and then we focus on how to drive the business. If the decision is to develop in-house. 4 and IBM did with mainframes. you are acquiring people. Drawing a lesson from Hewlett-Packard.Cisco Systems: The Acquisition of Technology is the Acquisition of People HR-10 p. you lose business momentum. early feasibility studies lead to decisions about whether a product is to be developed in-house or to acquire the technology through acquisition." 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. So we focus first on the people and how we incorporate them into out company. The Planning Matrix Since the market moves too quickly for all innovation to come from within Cisco. One of the key tools resulting from these rules was the development of a planning matrix to analyze emerging markets. partnering. services. Since 1993.. where you are acquiring branch banks and customers. the next step is to involve business development to determine the most appropriate acquisition target. Chambers noted "If you merge two companies that are growing at 80 percent rates. no matter how smoothly they operate. acquisition. If the decision is to acquire a technology. Cisco has acquired 24 companies (see Exhibit 3). and distribution needs for each market segment and a way of getting these products developed and sold--whether . for a period of time.. Chambers and his team adopted a philosophy of breaking up markets into segments. This is an average of an acquisition of one firm per quarter over the past five years. This quickly led them to the decision to acquire new technologies.

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

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

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

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

and distribution. like Andy Bechtolsheim. He also stays because "Most people at Cisco came from start-ups. several elements of Cisco’s experience with acquisitions are seen as key. who came to Cisco as a part of a 1994 deal and had founded several other companies says. He is optimistic. "We have the process down. Second. 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." Others. VP of business development. can change the world. came to Cisco when his start-up Granite Systems was acquired in 1996." Upon reflection. half of the chief executives and most of the senior management of the companies acquired since 1993 are still with Cisco. with Cisco’s marketing. sales." Since the purpose of any acquisition is to retain people and their intellectual capital. the processes are designed to empower and retain people. all acquisitions older than two and a half years have met this criterion. "If you are selecting a partner for life." In fact. Still. Giancarlo." This means focusing on acquisitions with high potential products that are close to being ready for the market. your ability to select the partner after one date isn’t very good. you don’t retain the rank and file. We spend a lot of time on the up-front." That is why this selection process is crucial for successful acquisitions. "Cisco is able to hold onto people like me because they gave me a chance to play a major role. the vision of the leader of the company being acquired and the direction they are headed must be compatible with . He stays because of a desire to build breakthrough products that. But the acquisitions are not financial--we don’t do them because we can swing a good deal--they are strategic. 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. your probability of having a successful marriage after one date is pretty small." 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. Mike Volpi. he likens the process to marriage. 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. Giancarlo notes that retaining the leaders of the acquired firm is critical since "If you don’t retain executive management. Sometimes in all this speed we end up paying too much. Volpi says. Not all acquisitions.Cisco Systems: The Acquisition of Technology is the Acquisition of People HR-10 p. We have a generic process. so the place has a small-company mentality. 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. First. To date. however. 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." In arguing why the guidelines are so important. have been successful. described their performance in acquiring Kaplana and Lightstream in October of 1994 as a case in point. We do them to grow the company in the right direction. the focus of any acquisition is driven by a clear identification of specific technology/product needs as identified in their strategic matrix . "If you don’t spend a fair amount of time on the evaluation of what are the key ingredients for that. who was a founder of Sun Microsystems.

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

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

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

Cisco scrapped the future and purchased another company with less advanced technology. they were organized by product lines. 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).Cisco Systems: The Acquisition of Technology is the Acquisition of People HR-10 p. it grows the pie bigger for everybody faster. Rather than wait for the customers to realize the value of the new technology. in 1995 Cisco acquired a company for $120 million. Says Chambers. All component manufacturing is outsourced but there is a centralized final assembly and test manufacturing organization. and Small/Medium Businesses (such as universities). 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." With this philosophy. and the U." The overarching intent is to develop high-value added products that offer high margins. Very few people in this industry partner well. "Partnering is our heritage. customers wanted more immediate solutions. Our aim was to drive our strategy down through the company. more importantly. Microsoft. Cisco has entered into partnerships with MCI. However." Organization Design At the time of the 1993 shift in strategy. To ensure decentralization. "The companies that get in trouble are those that fall in love with ’religious’ technologies. and finance. Achieving high margins and profitability growth is key to Cisco’s continual investment in technology." Arguing that networking is too complex for any one company to tackle. . Postal Service among others. In Chamber’s view. 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. Intel. 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. HP. 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. 13 ability to eat our young when the market grows so fast. Service Providers (such as telephone companies). so it’s a huge competitive advantage. distribution. about the same percentage as rival 3Com. this ability to scrap earlier efforts and move on is what separates companies like Cisco and Microsoft from the rest of the pack. 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. but one that the customers were comfortable with. At that time. The low levels of vertical integration increase Cisco’s flexibility to expand into new product lines. senior management decided to follow Hewlett- Packard’s lead and organize by business units." For instance. 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. Even though the future of their technology was very promising. he claims that "It’s better to partner than to compete because it allows time-to-market advantages and.S. The key to success is having a culture with the discipline to accept change and not fight religious wars. There are also frequent reorganizations to respond to changing markets. since they believed that time-to-market was they key to successful domination of the market.

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

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

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

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

it can be really confusing. "The markets have voted. and 35 percent of LAN switches. this means they need to attract the best people and stay in touch with expanding customer markets. 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. but more as system integrators. Chambers worries about this. Innovation is key. an analyst at Dataquest. In achieving this end-to-end dominance." But Chambers is optimistic. 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. says "The company’s product catalog looks like the phone book. he says. We make Andy Grove look relaxed. we’re bigger than the next four or five networking companies combined. "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. They need to integrate and assimilate their products as soon as possible. Cisco’s market share of routers was 84 percent. comprehensible family. Cisco may need to evolve from being primarily a technology company to more of a sales and service provider. 18 Future success requires continued flexibility and speed." The market seems to bear him out. I see IBM and Nortel [Northern Telecom] as our most likely end-to-end competition." 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. but making all this stuff sing together is difficult. "It’s that paranoia that keeps us on top.Cisco Systems: The Acquisition of Technology is the Acquisition of People HR-10 p." Smiling. "We worry about getting too far from the customer because companies that get fat and happy get in trouble. however." . In 1997. 38 percent of frame relay devices. 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. 73 percent of IBM systems network architecture. Don Miller. He says.

000 9.000 4.Cisco Systems: The Acquisition of Technology is the Acquisition of People HR-10 p.0 bil $1.4 bil $3.72 $0.54 Employees (approx) 12.37 $0.1 bil Net Income $1 bil $913 mil $456 mil $323 mil ROA 19% 25% 23% 29% ROE 19% 32% 29% 36% Income/common share $1.1 bil $2.6 bil $2.4 bil $4.3 bil Assets $5. 19 Exhibit 1 Financial Data (1994-1997) 1997 1996 1995 1994 Revenue $6.000 .52 $1.2 bil $1.000 2.

2 ‘. r ‘.4.4 I . Exhibit 2 Cisco’s Market Segments C.

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