Man on the Hot Seat at Cisco

Cisco Vice-President Ned Hooper will pursue an aggressive M&A strategy that will target bigger fish than the networking champ is used to catching

by Steve Rosenbush

Technology leaders have long struggled to maintain their dominance from one era to the next. IBM (IBM) stumbled as the mainframe gave way to the personal computer. Microsoft, the star of the PC era, beat back the threat of Netscape, only to face an even more serious competitor in Google (GOOG). Even early Internet powerhouses like Yahoo! (YHOO) and Time Warner's AOL (TWX) have faded with the rise of social networking sites like News Corp.'s (NWS) MySpace and Google's YouTube.

Cisco (CSCO) is fighting hard to buck this trend. The networking company grew into a giant in the last decade by selling routers and switches (the computers that direct traffic on the Net) to telecom companies and corporations. Now, with much of the infrastructure built, growth in that market has slowed, and Chief Executive John Chambers is determined to break into promising new markets closer to consumers. He has told investors that Cisco will boost revenues about 15% over the long term, exceptional growth for a company with $34 billion in annual revenues.

Growth Requires a New M&A Strategy

Perhaps no one will feel the burden of those high expectations more than Ned Hooper. The little-known 39-year-old was recently put in charge of business development, which includes mergers and acquisitions as well as venture capital investments. He's on the line because, to reach Chambers' goal, Cisco is being pushed to make bigger—and potentially riskier—acquisitions than it ever has before. "M&A is key," says Brantley Thompson, a communications equipment analyst with Goldman Sachs (GS). "A company that size can't rely on organic growth alone."

Cisco's core market is plenty healthy. Demand for routers and switches is growing about 11% a year. And Cisco is gaining share in the market, nabbing 17.7% of core router demand last year, up from 15.5% in 2005, according to Ray Mota, chief technology officer of market researcher Synergy Group. But organic growth won't be enough to realize the hopes of Chambers—and Wall Street.

The old formula for acquisitions won't work either. Cisco made its name by buying small, usually privately held companies just as they finished developing new technology. Cisco would use its sales force to sell the new gear to corporate customers who wouldn't open their doors to a startup. Sales would surge.

"The Only Way to Move the Needle"

But Cisco is now so large that it needs to make bigger plays to have an impact on the top line. It's stalking companies that already have substantial revenue, along with the potential for much more growth. One example of the new approach came in 2005 with the company's $6.9 billion deal for cable hardware maker Scientific-Atlanta (see BusinessWeek.com, 11/18/05, "Cisco's Bold New TV Bet"); another was the $3.2 billion deal for the online conferencing company Webex this March. But talk to Hooper and you get the impression that these deals may be only a warmup for what's to come. Larger transactions "give us a level of scale from the start, rather than building from scratch," he says. "It's the only way to move the needle at a company of this size."

Larger, however, almost always means riskier. Cisco has to put up more money to buy established companies. Bigger companies are more complex to integrate. And the company can't rely as heavily on its stock for acquisitions as when it was a boom-era high-flier like in 2000, when it was the most valuable company in the world. Cisco shares are up about 20% over the past year, to $26, but they're still far short of their peak of $80 in 2000.