There are many exit options for enterprise startups. Some will go public. But the most lucrative outcomes will come via acquisition. This is often done by highly acquisitive large rivals like Salesforce, Microsoft and SAP.
Cisco has an extensive history of purchasing its way to global success, from rivals to spinoffs. Over the course of its history, it has acquired more than 30 startups in the past four years. This brings the total number of acquisitions to 229 for the company's entire existence. Epsagon was the most recent acquisition, and five more were added in its latest quarter (Q4 FY2021), including Slido and Sedona Systems as well as Kenna Security and Involvio. Three of them were even announced in one week.
It starts by identifying potential targets. Cisco is intimately involved in a list of over 1,000 startups that might be suitable for acquisition.
What is the secret to success? It is moving at a faster pace than ever before What do startups need to know about Cisco if they are able to have productive talks with them? To understand how everything fits together, what Cisco acquires, why it does so, and what startups can take from this, we spoke with the CFO of the company, the senior vice president for corporate development, the general manager, and executive vice president for security and collaboration.
As you might expect, Cisco has developed a method over the years that helps identify startups that fit its vision. This includes product but also price and team. All of these factors are important to make a deal a success. Startups can expect a smooth process from targeting to closing to incorporating into the corporate fold.
Even with all of this experience, there is a chance it won't work every time. Cisco began M&A in 1993 with the acquisition of Crescendo Communications, a LAN switcher. This led to the company's massive switching business today.
It all starts with cash
You need cash to be an acquisitive business. Cisco has over $24.5 billion of cash and equivalents at the moment, down from $46 billion in 2017.
Scott Herren, CFO, says the company's cash position allows it to make strategic acquisitions whenever it sees them.
Our free cash flow net from capex is approximately $14 billion per year. This gives us a fair amount. Herren stated that the dividend is worth $6 billion annually. Although we do share buybacks to offset equity grant programs, that still leaves us with some cash year after year.
He views acquisitions as a way of driving top-line company growth and helping the company achieve its overall strategic goals. He said that when I look at where our acquisition strategy fits in the overall company strategy, it is really about finding the innovation that we need and finding companies that match our strategy.
Let's talk about the deal. Is it logical or can we meet a seller price? And is it something that I believe will remain a core part our company's strategy in terms of innovation and driving top line growth, he stated.
Acacia Communications and Duo Security are two examples of acquisitions that have both driven innovation and top-line growth, according to the company. Each component contributes to Cisco's growth, security, and observability strategy. Indeed, maintaining growth could be one of the main reasons for these acquisitions.
Match game
Although Cisco is still a networking equipment firm at its core, it has been expanding its markets and diversifying its business into other areas for many years. It has spent billions of dollars on companies such as WebEx (which it purchased in 2007 for $3.2billion) and AppDynamics (which it purchased in 2017 for $3.7billion just before its IPO). It also has made smaller purchases (by comparison) such as MindMeld, which it bought in 2007 for $125m, and numerous deals that were too small for them to have to report the purchase price.
Derek Idemoto is the SVP for corporate development at Cisco Investments. He has been part of helping to scout potential companies. His team starts the process of identifying potential targets and where they fit within a variety of categories. This includes whether they can enter new markets (as WebEx did), expand their markets (as Duo Security did), or acquire top technical talent and get some awesome tech, like they did last year when they bought BabbleLabs.
