Cisco is a huge $48 billion company and one big reason is acquisitions. Instead of an R&D budget, Cisco buys the tech it needs to grow and expand into new markets.
It often buys 10 or more companies a year, most of them small deals, but it will spend billions, too. For instance, it bought security company Sourcefire for $2.7 billion in 2013.
CEO John Chambers fully admits that he's bet wrong a few times, too. He’ll likely never live down shutting down Flip in 2011, two years after spending $590 million to acquire it. In 2013, he dumped another consumer acquisition home networking unit, Linksys.
Earlier this month, he told attendees of the Fortune Brainstorm conference in Aspen, Colorado, that he won't pursue consumer businesses at all anymore.
"The window was open for us to play in the consumer as data, voice, video came together. This is where you have to have the courage to take good business risks, because if you don’t, you never win," he said on stage.
In an interview with Business Insider, Chambers explained his acquisition strategy in more detail.
Most acquisitions fail, he says. "If we’re going to acquire, what are we going to do differently? We came up with six rules of thumb," he told us. "Whenever I’ve violated two of them, I usually get into trouble."
They six rules are:
1. Share a vision. "Do you have the same vision of where industry is going as the target of your acquisition? If visions differ, you might get together economically for a while, but then you are going to have problems," he explains.
2. Corporate cultures have to match. "You know at the beginning. You listen to them: if [they] mention customers, if they share the success of the company with their employees, or just a couple of people at the top make all the money," he says.
Plus he looks for "a healthy paranoia," explaining, "That’s what Silicon Valley is about. We all know we can get unseated very quickly — as quickly as two years."
3. Know what you are really buying, the people and the tech. "Understand what you are acquiring and protect it at all costs," he says. "You are acquiring people and next-generation products. You are making an investment that together you can grow faster, make more profits, and take more market share."
If key people won't join Cisco, and the cultures are not similar enough to keep most of the employees, he won't buy.
4. The acquisition should be "strategic." He's looking for "a minimum target of 40% market share" and companies that have what he calls "sustainable differentiation" — meaning they have a unique technology not easily copied. And it also has to be profitable, "good industry-average margins."
5. The closer the location to Cisco the more successful the acquisition will be. "Geographic proximity is very important. Once you get out of the country, odds go down even more."
That's particularly interesting because at one point, Chambers threatened to stop buying U.S. companies mostly for the tax implications. He doesn't want to have to important off-shore cash for the transaction and pay taxes on that cash.
So is he looking for offshore companies to buy. "Still am," he tells us. "But it makes it harder. You just go with your eyes wide open. You also don’t also go with a company that doesn’t have 'sustainable differentiation' or with a culture that’s different."
6. Listen to your existing customers. "If you listen to them the right way, they’ll tell you who to acquire, they’ll tell you want you are doing right and wrong. They’ll tell you what your challenges are in the future" he says.
Even if he does all of that right, he says 1 out of 3 acquisitions will still fail, as in people will leave Cisco, or revenue targets won't grow, or the product will flop completely.
"If Cisco is world class (as many people say we are) with acquisitions, we’re going to [do well] with 2 out of 3. That means we’re still going to miss on 1 out of 3," he says.
