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

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

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

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

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

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

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

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

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

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

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

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

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

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

it’s become a part of my life. It would be difficult for me to go to [a competitor] at this point because I feel a part of Cisco. 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. Cisco also has parties--including a Christmas bash with 100 food stations and entertainment ranging from Elvis imitators to psychics. Management salaries are about 65 percent of the industry average. There’s no time for it. This is seen as becoming more important with growth and inevitable compartmentalization. "I don’t have to get permission on every little thing. As one employee said. the annual performance review includes an evaluation of whether supervisors have spent their reward budget. They have also hired Ringling Bros. But executive salaries are only about 25 percent of the industry average. Individual contributions are widely celebrated around the company." 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. Company bonuses are also generous. Or worse. Barnum & Bailey or Cirque du Soleil for other events and provide the usual complement of other employee-friendly services such as on-site stores. with a full 40 percent of all Cisco stock options in the hands of individual employees without managerial rank. with all . fitness centers. Like any good Silicon Valley company. 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." says one employee. and the average employee who has been with Cisco for over a year has over $125." The culture and values are also reinforced through the way jobs are structured and managed. rather than dictating the task. To encourage the use of these. unlike Dilbert-land. especially the people I work with. If you don’t have a culture that quickly embraces the new acquisition. it’s put more as a question to the team--a challenge. with webcasts of important events delivered to desktop computers. For Cisco employees in sales offices there aren’t even assigned spaces.000 for going the extra mile--and these can be approved within 24 hours. they know they are going to be combined and political warfare sets in. Chambers is paid $250.. then the odds are high that your acquisition will fail. and automobile oil changes and mobile dental clinics with appointments made via e-mail. That’s on top of an average starting salary of about $70.Cisco Systems: The Acquisition of Technology is the Acquisition of People HR-10 p.000.000 as chairman. anybody can give anybody else an on-the-spot bonus ranging from a free dinner to as much as $5.. recognition.000 in profit on unexercised options. with the approval of the boss. empowerment. Attempts are made to create an exciting environment through high levels of motivation. The culture and values are also emphasized in communications through the company intranet. "Never in my life have I seen such consistency in recognition.000 and former CEO John Morgridge earns a mere $50. and removing barriers to creativity. if you are not careful about the selection process. Aligning the Reward System The reward system is also carefully aligned with the strategy and values of the company. To reinforce the culture a variety of mechanisms are used to relentlessly communicate the values. Micromanagement is rare. Stock options are distributed generously. 16 people and a culture." For example. Another adds that "when there’s a problem. I have a very Cisco-centric view of the world. dry cleaning services." At Cisco. ATMs. Mimi Gigoux said. Quarterly "all hands" meetings are held to communicate the big picture and to make sure everyone feels included.

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

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

000 9.2 bil $1.52 $1.000 2.72 $0.3 bil Assets $5.0 bil $1.6 bil $2.000 4.4 bil $4.37 $0.1 bil $2. 19 Exhibit 1 Financial Data (1994-1997) 1997 1996 1995 1994 Revenue $6.Cisco Systems: The Acquisition of Technology is the Acquisition of People HR-10 p.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 $1.54 Employees (approx) 12.000 .4 bil $3.

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

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