John Chambers, chairman emeritus of Cisco (now founder of JC2 Ventures), knows a thing or two about tech acquisitions: he bet his career on a first one in '93, and went on to complete 180 M&As during his 20 years tenure.
His latest message for large corporations is an alarm bell. In a fireside chat at the HAX M&A Masterclass that followed the publication of his book: Connecting the Dots: Lessons for Leadership in a Startup World, Chambers issued a clear warning: learn about tech M&As or the future might happen without you.
Here are the key lessons to take away (video and transcript are here):
When stepping down from Cisco in 2015, John Chambers said that 40% of companies will be dead in 10 years. And 10 years might now be conservative.
It took about 20 years to Amazon to challenge WalMart, barely 10 to Airbnb with hotels and to Uber with taxis and car ownership. The next wave might just take 4'“5 years. Since no company can invent everything'Š'”'Ševen Apple or Google buy startups routinely'Š'”'Šyou'll need to either buy or partner seriously with startups (more on that later).
'˜Every company you'll acquire over this next decade will probably be indirectly or directly a tech company', said Chambers.
Non-tech companies need to get up to speed on how to work with tech, and startups. Many of the corp dev executives who attended our last event were not from tech.
I met recently power tool companies from US and Europe . They had just set up CVC arms. They were looking into acquisitions, saying '˜we don't know software'. They'd better tackle that M&A learning curve quickly!
There was only one Steve Jobs, who just knew what to build. For others, your customers will might you what to buy. Listen to them and pay special attention to market transitions to buy next generation products.
Like Chambers experienced early in his career at IBM with mainframes, and at Wang Laboratories with mini-computers, missing a critical shift might be the end of you! The corollary for startups is: do something cool for key customers of a corporate, and you'll get on their radar in no time!
'œWhen you buy a company, everything is negotiable except strategy and culture', said Chambers.
Oracle has mastered takeovers but for most others, acquisitions can fail due to a poor alignment of vision for the industry and each company's role, cultural mismatch, geographic distance or lack of integration of systems (once you scale your number of acquisitions, having different divisions or subsidiaries use different software will make your CFO insane).
There is generally more than one possible M&A target, and Cisco often walked away from potential buys for the above reasons. It also developed efficient processes: '˜I used to view process at bureaucracy, but process done right can give you speed that others cannot match', Chambers added.
Back in the 90's tech M&As were often failures. Chambers and his team researched why and built Cisco's playbook, then tweaked it for 2 decades. According to Chambers, most of it can apply to other companies. So save yourself some time and costly attempts by getting his book ;)
Interestingly, they approached the leadership transition in the same way: they studied what made them work or fail, and made it as smooth as could be when John stepped down in 2015.
One common trait of experienced corp dev teams is the amount of work they put in before they approach a startup.
Not only are they aware of many through their own research, their customers, business units, CVC arms or the media, but also via extensive networks, including with VC firms.
Like investors, you're only as good as your deal flow. Corp devs then model the value a startup might bring, and pay the right price for it (more on this below).
A hot startup can command a high price, but is it worth it for you?
If it offers no complementarity or synergies, it might in fact be of negative value. On the opposite, the current revenue of a startup might be irrelevant if you can blow their product through your channels and make it 10x or 100x.
The company Chambers bought in '93 for close to US$100million only had US$10 million in revenue. It paid off in droves.
When you buy a tech company, you must try and keep the talent'Š'”'Šespecially founders, emotional leaders and engineers.
Understand '˜Leaders Currency': Track record, Trust and Relationships. So involve your HR team to answer key questions and help define attractive career paths within your organization for the acquired teams. If you fail to do so, people will leave or underperform, and you will not get the new products you hope for.
At Cisco, about 1/3 of the top leadership came from internal promotions, 1/3 from recruiting and 1/3 from acquisitions. At peak it likely had about 100 former CEOs on payroll!
Despite its stellar track record, about 1/3 of Cisco's were failures. Reasons may vary, and some might be caused by market changes. When it decided to shut down Flip Video within 2 years after its $590 million acquisition: Apple had just added cloud video capabilities, it was game over.
Expect them, learn from them, and be ready to cut losses and, ideally, redeploy people.
As the pace of innovation accelerates, and top talent joins startups rather than large companies, startups might become threats faster than you can buy them.
Chambers suggested that the next-level skill to develop is the ability to form strategic partnerships very early on with startups, such as this recent JV between Boeing and the much smaller 5-year-old A.I. startup SparkCognitionfor urban aerial mobility.
Thanks to speakers, participants and supporters of this Masterclass series, in particular: Natasha Ligai (Logitech), Todd Neville (IBM), Christina LaMontagne(Johnson & Johnson), Anne Samak de la Cerda (former CFO, Withings), Dan Fairfax, (former CFO, Brocade), Amanda Zamurs and Larry Chu (Goodwin), Kate Whitcomb and Ethan Haigh (HAX).