What is acquisition success?
When we acquire a company, it's being able to harness the value of the acquired company. It's a broad statement, but it all comes down to integration. The goal is to achieve and scale the expected value.
It's not a simple task. A lot has to fall in line and there are many challenges along the way for any deal. That's what our team is constantly striving for - how to get the best value out of the deal and ensure we don't break the acquired company.
Accelerating M&A integration planning
Most of the time, when we have a deal, the engineering team sponsoring the deal wants to integrate the company tomorrow. So as soon as the deal closes, get them integrated so we can scale the business and get some of the value for which we integrated it.
But that's not an easy task. Many things have to go into that, especially for a company the size of Cisco.
First, as we go through that pre-commit phase to determine whether we move forward with a deal, we try to parse out the strategy behind the integration. Knowing the strategy behind the integration helps their team identify the following:
- What to preserve in the target company
- What are the integration risks
- What are the plans to address the risks
- What are the costs required to achieve the expected synergies
Having those kinds of solutions on paper is crucial to understand the implications and the requirements moving forward. The idea is to be able to execute immediately after announcing the deal.
A lot of this happens pre-LOI. This is where we often have a lot of back-and-forth with the engineering teams.
- Do they plan to incorporate the company required into our existing portfolio?
- Do we plan to set it up as a standalone?
- Do we plan to continue to leverage the existing route to market?
- Are there expected to be changes around that?
- If we want to incorporate it into our portfolio, how quickly do we think we'll be ready with the technology integration so that our sales teams can sell it?
All those things have to work in parallel to ensure that when we're about to execute, everyone is on the same page about what we're driving towards.
Corp dev and integration working together
The integration team becomes involved as soon as Cisco’s corporate development team decides to move forward with the deal. Or anytime corporate development once to do some scenario planning or to understand some risks, they would pull the integration team.
So the first step is understanding the value we're trying to acquire.
- Why are we acquiring this company?
- Is it because of the talents?
- Is it IP?
- Is it synergies with our products?
Making sure there's clarity also helps us understand what the pieces we want to preserve and not break in the target company are.
Step two is planning how we integrate the target company in.
- How do we plan to integrate the company?
- Is it something that we have to leave standalone?
- Is it something that plays into our existing portfolio?
- How quickly are we trying to do this?
All of these were talking at a high level. We've done many deals at Cisco and know the plays we need to run. We know where the risks and considerations that we need to account for are just by understanding the nature of the deal.
Also, the nature of the deal will dictate which stakeholders need to be involved and which ones need to sign off on. Once we get a sense of the value we need to preserve and the strategy we want to leverage, we will need some executives to sign off on it.
A lot of times we do this in parallel with our commit process leading up to the announcement. But we will make sure we pull in specific executives that have a stake in making this deal successful.
So all of this is prior to announcing so that on day one we can execute fast. We have this pre-approved team in place that is ready to execute on day one.
Effect of integration on LOI
A lot of times, we will do risk assessments across the whole company to understand the anticipated impact of the deal. For example, what are the functions impacted, where are the risks, and the level of risks?
A lot goes on in our commitment process, and one of them is highlighting the biggest risk areas of the deal and the tradeoffs we are willing to make. That now feeds to the negotiation process. The integration team pulls together a whole risk analysis across the entire company.
We start with a big picture and refine it as we get more information. But we'll look for areas of synergies. We have a pretty big team at Cisco, so everyone is an expert in areas and we can run very quickly across the whole company because everyone knows what they have to do and how they have to assess a deal across the company.
Approvals required
Our main commit process is really called the CFO commit process because it's where we present to the CFO for the final sign-off. And in that meeting, we have key executives included as well.
But before that, we are also running a COO commit process. This is where we're looking across all of our operations, including customer excellence. We understand the deal's impact and what will be required to achieve value drivers and ensure alignment within all of our operations. This all gets funneled up and summarized into the CFO commit process.
It's pretty straight to the point.
- Here's what the deal is
- Where is the value that we see behind acquiring this company
- Here are the things that we want to preserve
- Here are the requirements of the COO
- These are the functions that needs to be required to support this deal successfully
Once we get approval, we will get the LOI signed, now we're in diligence. In diligence, we're very focused on anything that would cause us not to do the deal.
- What areas could potentially have a walk away from the deal?
- What are the certain areas that we want to double-click on?
And that's where we spend most of our time during diligence. Assuming that things check out, there's that final sign-off with a CFO, and then we proceed to announcement and execution.
Difference in commit processes
We have the CFO pre-commit, the COO commit, and then the final CFO commit.
During the pre-commit, we often need more information. It's more of a directional approval with big strategy items. We call out some of the things we need to figure out but need to learn more about it. Then, we try to answer if we really want to go in this direction.
And then, if we do decide to go in this direction, we do the COO Commit. It is where we get alignment across operations, and then all that funnels into that final CFO commit process. It's the final agreement to move forward with the deals.
M&A integration planning
Integration planning starts as soon as we are all under NDA and we engage any functional leads. We start scenario planning and understanding the different implications of the deal.
Approaching the target company
We must tread very carefully when engaging with the target company. First of all, we are a big company. So we tend to overwhelm companies just by our size, so we want to be mindful of that, especially in diligence.
We don't want to show up with 50 people to diligence when they have four people in a room. So we're very mindful of how we approach interactions with the target company.
We also do a lot of one-sided planning. Corp dev ends up sharing much of the information they have with the central integration team. And that gets dispersed out to different functions.
If there's going to be an engagement, we are careful about
- Who really needs to be there?
- What's the purpose of engagement?
- What are we trying to solve?
- Is this the right time to solve that?
- Would that create risk in the negotiations?
There's a lot of work behind the scenes, and we have an army of people who are cross-sharing information to avoid multiple people asking multiple questions multiple times.
Team structure
Cisco uses a pillar model that utilizes broad organizations instead of functional teams, which includes:
- Operational requirements team
- Customer excellence requirements team
- Legal, Tax, and Finance team
- HR team
- Go-to-market team
And then we have horizontal teams that tie all those together. The pillar model also simplifies the functional model and makes understanding the target company easier. This pillar has helped us simplify the engagement so that we understand who is on point overall. In addition, it also helps us step back and see what matters.
The things that came very apparent quickly was that the engagement was much simpler and you didn't have an army of people for every meeting anymore. If it's an HR meeting, everyone doesn't have to be involved anymore, and those were the quick results of this team structure.
Preliminary diligence
Sometimes, you don't know everything, and there are things you can't know. So what we do is scenario planning. We try to understand the different implications and solutions based on things we don't know.
We keep the scenarios upfront; sometimes, we vet them out with the executives, so they know the possible outcome.
Learning from past experience
One of the areas that we have gotten much better at is data quality. Historically that was not an area of focus for us, but we're now spending more time on it. We're spending a lot of time understanding how we are capturing the data that will be critical for the assumptions when we are acquiring a company.
So if we are projecting specific revenue synergies, we have to make sure we have a line of sight to some of those numbers and data. It's also important to keep track of how we are giving customer information and how the target companies are capturing that data.
Accelerating M&A integration execution
When we get to the other side of the announcement and are ready to execute, it is extremely important that everyone is clear on the plan and strategy and that everyone is running in the same direction.
The execution team needs to have experience. The leadership team must also help and anticipate roadblocks during integration so that the execution team can address them as quickly as possible.
A lot of what we do is around enabling the offers so that we are ready to sell, but that's only one part of the success. You have to make sure that the sales are actually ready to sell. And you can do that by providing the right incentives.
It doesn't matter how quickly we accelerate the execution on our side. We could have offers and products ready to be sold, but it takes the go-to-market teams being ready for integration to be successful.
Measuring synergies
Regarding revenue synergies, we look at the existing company's revenue and if we intend to incorporate that into our existing portfolio.
- What's the revenue plan
- Is it realistic
- We have our sales leadership closely involved so they can figure out if it's something they're confident to scale.
- Do we feel like there's going to be an attrition with the acquired sales team?
Those are all things that are required for that revenue synergy to work.
On the cost synergies, we try to understand where they lie. But we would rarely do a deal because of cost synergies. It's more around getting out what those numbers are but what we are very mindful of is the actual cost of integration.
We have a very deep supply chain and it's not a simple task to integrate them, so a lot goes on into that analysis. And if we do have significant costs synergies, we make sure that we have stakeholders who are experts in those areas to validate those numbers.
Steering committees
We do have steering committees. Our central integration team is the one that run those for the bigger deals. The big ones are on recurring cadence because it's needed to talk about the issues.
But the reason we have steering committees is not that it's a checkbox item. We need the leadership to align around the roadblocks and make decisions to move forward.
This is why the steering committee membership is geared towards key decision-makers for any deal. These are the stakeholders required for successful integration.
If the deal is big, the steering committee is around 30 to 40 people, they would be meeting quarterly. It will be fewer people if the deal is smaller. Most of the time, we talk about the value drivers and the status of how we are working towards them.
Accountability
Accountability starts with your functional ownership. What are you accountable for? In addition, through the CFO commit process, each function that's had a component of that value that we acquired makes commitments in that CFO commit.
The functional leaders make those commitments, and that's when accountability is created for that specific deal.
When we have changes in leadership at times, we want to make sure that a new leader, who maybe didn't commit in the first place but who's now onboard, understands what was committed in the past and continues to support it for what's required going forward.
Levels of M&A integration
There's always been an intent to integrate. Sometimes we don't integrate right away because we don't have the capabilities required to do it successfully. There have also been decisions not to integrate fully because we don't want to break the acquired business.
There have also been times when we visit companies we have not yet integrated. We're very mindful of the companies we have not integrated. We're revisiting some of the legacy deals that we acquired not years ago, where maybe at the time, it didn't make sense for us to integrate it because we couldn't have done it successfully, but now we have different capabilities.
It also helps the integration team be busy when we don't have new deals coming in.
Success Tips
We learn a lot from every deal we do and from the deal that we don't do. To accelerate the pace of integration, everyone must learn from past deals. You can also learn from successful deals and how they do it.
The most successful integrations focus on the people side of the transaction. They focus on the acquiring team and the acquired team and how those two teams we come together have a partnership around success.
Many things don't show up on diligence and can only be identified by forming relationships with the target company.
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