MANAGING REVOLUTION: A horizontal future for mergers - Many have had their fingers burnt by an acquisition that went wrong. By ignoring the old rules, however, some companies can report near magical success

MANAGING REVOLUTION: A horizontal future for mergers - Many have had their fingers burnt by an acquisition that went wrong. By ignoring the old rules, however, some companies can report near magical success - High-tech superstars are setting the pace not

by ROBERT HELLER, founding editor of Management Today
Last Updated: 31 Aug 2010

High-tech superstars are setting the pace not only in organic super-growth but in acquisition - none more so than Cisco Systems. Having bought 40 companies in six years, Cisco has lately sprinted along, buying four companies a month: and it claims nearly all of these mergers are succeeding.

That sounds simply miraculous. Figures produced by KPMG for all business show that 83% of the costliest mergers in 1996-98 failed to boost shareholder value, and half actually reduced that precious number. Yet 82% of the executives in 107 companies (out of 700) thought their deals were successful - just like Cisco's John Chambers, but without his justification.

Even with two or three admitted flops, his success percentage is still astounding. So what's his merger magic? To begin with, Chambers ideally picks small start-ups - the smaller the buy, the less problems of assimilation - with a wonder-technology that will come to market in six to 12 months' time.

Most amazingly, Chambers recently paid dollars 6.9 billion for Cerent, a loss-making, one-product company in 'optical transport', whose turnover is only dollars 100 million. That sounds crazy rather than magical. But Cisco's criteria for acquisitions are not the usual financial measures. Rather, he judges success by the retention of people and the revenue that the buy generates two or three years later on.

His strategy and tactics are governed by the 'tornado market', which happened so fast that Cisco was forced to adapt its management system to its searing pace. Because it couldn't recruit enough people to man the phones, it moved technical queries to the web, which now handles 70% of them. Its site also sells dollars 32 million of products daily. Nobody touches the orders as they whiz through the system, with huge savings in costs and in inventory.

That's only part of what Microsoft's Bill Gates calls the 'digital nervous system', or DNS, of the company. Cisco can close its books in a day. It provides video training at people's desks by intranet and extranet (linked with Harvard). Because it knows the order status every minute, it never has to make forecasts. Decisions are taken on real-time information. And the acquisitions slot into Cisco's DNS with evident ease.

A system called Ciscofast sends an audio and video message to new people, who are immediately absorbed into the electronic management structure.

Veterans of typical large mergers, like Peugeot and Citroen, still speak with horror of the two years of structural mayhem before one and one finally added up to two. Sometimes, of course, that never happens - witness pharmaceuticals.

According to Business Week, only one of six drug mega-mergers resulted in market share gains in 1990-98. Britain's very own Glaxo Wellcome and SmithKline Beecham were the two largest losers, with the latter dropping share by some 20%. Even the sole merged winner, Bristol-Myers Squibb, was miles behind Abbott Laboratories and Pfizer, which achieved market share gains of around three-quarters.

Yet drug companies are, you would think, bound by their very nature to honour and obey one of Cisco's main commandments: never buy current market share in current products. Everybody knows that pharma profits hinge on successful exploitation of new drugs, like the Viagra breakthrough that remade Pfizer's fortunes. For all that, the main emphasis of pharma-mergers has been strictly current: heavy cost-cutting.

Novartis, for example, took dollars 1.2 billion out of the administrative costs and overheads of Ciba-Geigy and Sandoz. But that did nothing to rejuvenate a tired portfolio and lagging sales. Mega-mergers only intensify the tendency of drug companies to operate in hierarchical, vertical modes - which are quite the opposite of Cisco's horizontal structure. And Chambers is right in saying that horizontal companies will win - and always have done.

The DNS is essentially horizontal. Anybody, anywhere in the company has access to the system and uses its facilities in their day-to-day work, relating directly to others in the company, regardless of their position or status. These easy, rapid connections speed up actions and reactions and, as Chambers also says, fast always beats slow.

Equally important, the flat, participative system helps to retain the high talents who are prime acquisitions in any corporate purchase.

In an industry where 80% post-merger desertion is quite common, Cisco claims a mere 6% voluntary annual loss.

That is the final key to its merger miracles.

With the DNS, moreover, you will 'have the capability to create the profits which will allow you to have the market cap which allows you to acquire'. That in turn opens the door to constant extension of the real benefits of acquisition.

These lie, not in slashed head counts and operating costs (which the DNS itself reduces, anyway), but in the acceleration of organic super-growth.

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