Stay with me on this one because I’m going to take you on a journey of discovery — for me and for you, which makes it all the more exciting. I’m not sure what conclusions we’ll reach, if any, but we should benefit from the trip. At minimum, we’ll end the voyage with an intriguing question.
Speaking of which, let’s kick off proceedings with this one: What has happened to Cisco’s legendarily prolific acquisitiveness? Where’s it gone?
After all, it wasn’t long ago that Cisco boasted freely about its acquisition and development (A&D) genius, about how it led the way in strategic entrepreneurial innovation through novel mechanisms such as “spin-ins.”
Cisco’s acquisitive pace has slowed. When it does make acquisitions, it is as likely to plunk down billions of dollars for well-established companies, such as Tandberg or Scientific Atlanta, as it is to execute tuck-in or spin-in maneuvers involving small, easily assimilated targets. Cisco’s acquisitive finesse, its dash and flash, seems to have deserted it. Now, when it pulls the trigger on an M&A deal, it tends to be big and ponderous, more akin to the profile of a bloated HP acquisition than to that of a surgical Cisco strike.
Cisco’s Spin-In Glory Days
To understand what might have happened we have to go back to the glory days, back to when Cisco first showed off its spin-in moves.
Such deals typically involve a parent company, such as Cisco, allowing a team of engineers and business managers to leave the corporate nest to create breakthrough products and technologies. These arm’s-length ventures are funded by the parent company exclusively or sometimes by the parent company and other investors, such as VCs. The parent company’s ownership ratio of the venture increases as technology milestones and business objectives are reached, until eventually the venture is spun, in its entirely, back into the mothership. Hence, the term “spin in.”
Cisco executed a number of spin-in arrangements, but its best-known examples involved storage-networking startup Andiamo Systems, which Cisco officially acquired in the summer of 2002, and Nuova Systems, which Cisco finally acquired in full in the spring of 2008.
The companies had more than their spin-in natures in common. Both were led by Mario Mazzola, Cisco’s on-again-off-again chief development officer (CDO). What’s more, the teams at both companies included many of the same players, namely Luca Cafiero, Prem Jain, and Soni Jiandani.
Cisco CEO John Chambers’ link to Mazzola goes back ever further, to Cisco’s first-ever acquisition, in 1993, of Crescendo Communications. (I told you we’d be going on a journey.). As a Cisco VP, Chambers was a leading player in Cisco’s acquisition of Crescendo, and he also managed its integration afterward.
Internal and External Critics
While Cisco has portrayed its spin-in moves as unalloyed successes, external and internal critics have demurred. Some external observers say Cisco overpaid for these cozy ventures. Meanwhile, many Cisco employees weren’t pleased about being left on the platform while spin-in bullet trains carried fortunate passengers to extravagant wealth.
From a Forbes article, originally published in the fall of 2008:
Cisco bought Nuova last April for $678 million, part of it contingent on its meeting sales targets. This was a nice price for something with no venture capital investment and no revenue. The Nexus 7000 was then developed inside Cisco in tandem with Nuova’s product, which became the 5000.
All this research funding of outside projects had some harmful effects inside Cisco. When the stars left to start Nuova, Chambers elevated three executives to positions that put them in line as possible successors. All three have since left Cisco.
“Spin-ins are a creative model to accelerate innovation and bring in engineers you couldn’t normally recruit–and financial gains go to entrepreneurs, not venture capitalists,” says Jayshree Ullal, a 15-year Cisco veteran who built the 7000 then left last May as the Nuova people came back in. “But it’s a nightmare when the guy in the next cubicle is a multimillionaire and you aren’t, because you weren’t chosen.” She left Cisco for personal reasons, she says, adding that she had to deal with a lot of unhappy employees over the spin-in structure.
Chambers says all three left not over Nuova, but in response to a new style of management he has installed at Cisco. “They were good people, but they were command and control people,” he says. “I have to have collaboration, with sustainable, repeatable processes below the CEO level.”
Chambers’ protestations notwithstanding, it’s apparent that the spin-ins resulted in at least a measure of distracting invidiousness within Cisco. To many employees and the VPs who managed them, spin-ins were susceptible to corporate cronyism and inherent bias.
Need Still Exists
Curiously, for whatever reason, the spin-ins seems to have come to a halt. I haven’t seen or heard of any recently, though it’s possible they could make a return. Mario Mazzola, Prem Jain, and Luca Cafiero have been quiet, too. While it’s true that Mazzola has had as many dalliances with retirement as Brett Favre, he might have another venture brewing . . . though probably not.
In all likelihood, that storied team, the one that formed the core of Andiamo and Nuova, which gave Cisco its Nexus data-center switch, has served in its last spin-in company.
Perhaps the spin-in concept itself has run its last race at Cisco. Then again, maybe not. Maybe it will come back in a slightly different form, more palatable to investors, board members, and employees alike.
Cisco still could benefit from ensuring that certain strategic initiatives and contingency plans are funded adequately and allowed to develop outside its walls and beyond the reach of its increasingly bureaucratic grasp. With VC-funded companies dwindling and a paucity of interesting startups on the immediate horizon, Cisco has been forced to play a higher-priced game of M&A. That’s not how Cisco made its M&A bones, and it’s outside the company’s comfort zone. It involves greater risks than the old model, which mostly favored tuck-in acquisitions of technology-laden, VC-funded startups.
New Riff on Old Theme?
One can see why Cisco might wish to bring back a reformed spin-in move.
What that in mind, it’s interesting to note the above comments of Jayshree Ullal, now CEO of Arista Networks. She saw the drawbacks of the old spin-in model, and she left Cisco to lead a company that has developed high-performance data-center switching gear that offers an alternative to Cisco’s Nuova-derived Nexus.
She’s been joined there by a number of fellow Cisco refugees, all apparently bankrolled, to the tune of approximately $100 million, by moneybags founders Andreas Bechtolsheim and David Cheriton.
For Cisco, finding employees rich enough to fund their own capital-intensive startup companies probably doesn’t represent a scalable or particularly viable variation on the spin-in theme. Will Cisco come up with an answer, or has it permanently lost an A&D touch that was considered a source of competitive advantage?