John Chambers (ex Cisco) on how corporates can make successful startup acquisitions

Take it from a CEO who made 180 acquisitions over 20 years

I was fortunate enough to meet John Chambers, the legendary Cisco CEO, at an event recently. 

Okay, so it was me plus a bunch of other people, but we got to talk to him for a while afterward. 

I had seen Chambers on stage, but seeing him in a much smaller group was just magic. After all, this is one of corporate America's elite CEOs, having transformed Cisco from a $70 million SME to a tech mammoth generating $47 billion in sales 20 years later. 

Along the way, Chambers made around 180 acquisitions, some of which were startups (a partial list can be found on Wikipedia here). 

The most astounding statistic Chambers shared with us is the low level of attrition at acquired companies: only 4% of their personnel would leave the Cisco group, a small number by any standard.

The secret sauce: Cisco's culture. 

Cisco would only target companies that had a compatible culture with theirs. Easier said than done. When I asked him how he made sure that cultures would not clash, Chambers gave a few pointers, including the type of activity the target was engaged in (e.g., if it was an engineering company or a service company), or the international angle.

Blah blah. 

It became interesting, however, and frankly disturbing, when Chambers told us that in the end, he would not sign the deal if HE believed the CEO of the target would not stay. 

"I would look the startup CEO in the eyes, and understand if he/she was going to stay." John Chambers

Not a highly replicable formula.

Chambers then gave us a quote by another legendary business figure, GE's former CEO Jack Welch: "The culture of a company is the shadow of its CEO." 

What this quote, which Chambers seemed to follow like a mantra, indicates is that the CEO-to-CEO relationship is a critical element of the acquisition: since each CEO makes the culture in his/her respective company, they both need to be culturally compatible to start with. 

All very nice, but I then pressed Chambers to give us more concrete tools and tips, and he came up with a couple of insightful ones. Such a charming man (I mean it).

Earn-outs: best practices

Firstly, Cisco would use earn-outs, which probably doesn't come as a surprise to our readers here. Large groups are used to putting in place these "golden handcuffs" on the principal leaders of companies they acquire. 

One mistake they often make when they purchase startups, specifically, is that the upfront payment is too small compared to what comes next. 

Another mistake I see is that the earn-out payment depends on the corporate doing something, such as opening up its customer base, integrating the startup's offer into its own, or making other assets available to the acquired company, to accelerate its growth. 

As this rarely translates into reality, earn-outs become worthless, and the startup founders end up leaving. 

What was interesting in Cisco's approach is that they would not extend the earn-out period over two years. It is a great best practice that I believe most large groups should adopt. A lot happens, or doesn't happen, in two years. 

Walk the talk

The other piece of wisdom worth noting is that Cisco would walk the talk: Chambers would appoint successful CEOs of acquired companies to his leadership team. He told us that up to one-third of top executives at Cisco were initially from outside the group. The possibility to go up the ranks was a huge booster to make target CEOs agree to the acquisition. 

This is where the culture of meritocracy and openness comes into play. Remember: it reflects the shadow of the CEO.

PS : I moderate a Private LinkedIn group on Large Groups and Startups, covering all the types of relationships between the two (alliances, open innovation, investment, buyouts, etc.). Please send me a LinkedIn message if you wish to contribute. We aim to keep it limited to foster meaningful discussions.